Mobile Opportunity

Why Web OS Really Failed, and What it Means for the Rest of Us

2012-01-03T12:27:00.000-08:00

The New York Times has an interesting article this week explaining why HP's adventure with Palm failed. The latest explanation is that Web OS just wasn't ready for prime time, according to Paul Mercer, who was senior director of software at Palm (link).

Paul's an extremely bright software guy. It's unusual for someone with his seniority to go on the record with criticisms of his former product, and I applaud him for it because it helps us all learn. If Paul says Web OS was unready, I'm sure it was. But respectfully, I don't think that's why Web OS failed. I think the company's business strategy was fundamentally flawed, in ways that would have almost certainly doomed Web OS no matter how it was built.

The point is important because other companies planning similar products might take away the wrong lesson from Palm's demise. (For example, Information Week concludes that it's too hard for any startup to play in the mobile device market [link]; MIT Technology Review says the lesson is that you have to retain key employees [link].) To explain what the right lesson is, I need to give you a little background on the dynamics of creating a new operating system.

New operating systems always suck

Sorry for my language, but sometimes it's best to be blunt. An operating system is an incredibly complex piece of software, just about the most complex software you can write. In the first version of an OS, the list of features you want to add is always much longer than what you can implement, there are always bugs you can't find, and performance is always a problem. What's worse, there is a built-in tension between those three problems -- the more features you add, the more bugs you create. The more time you spend fixing bugs, the less time you have to improve performance. And so on. As a result, every new operating system, without exception, is an embarrassing set of compromises that frustrates its creators and does not deliver on the full promise of its vision.

Remember these beauties?

--The original Macintosh can't create a word processing document longer than 10 pages.

--The original version of Windows can't display overlapping windows.

--The original iPhone doesn't allow third-party native apps, and lacks 3G and MMS support.

The operating systems that succeed are the ones that survive long enough for their big flaws to be fixed. That happens if the OS's supporter has a deep, multi-version commitment to it (Windows) or if the OS does something else so compelling that customers are willing to buy it despite its flaws (graphics on the Mac). Your chances are best if you have both patience and differentiation.

Palm's problem: Lack of a compelling advantage

The Palm Pre and HP TouchPad had neither advantage. Palm was not rich enough and HP was not patient enough to keep investing after the first versions showed a lot of flaws. And more importantly, there was nothing compelling enough about either product to make people buy it despite those flaws.

Think about it, what was the one special thing Web OS devices could do that absolutely compelled you to go out and buy them? And don't say "multitasking;" I'm talking about a genuine, easily explained benefit that would appeal to normal people, not technophiles.

I wrote about this problem back in 2010 when the Palm put itself up for sale (link). To recap: you don't run TV ads featuring a Borg hive queen if you have something compelling to say about your product (link).

Hi, I'm here because the ad agency couldn't figure out anything concrete to say

Contrast those ads to Apple's current iPhone ads in the US, which are basically a 30-second demo of Siri (link).

The original Palm OS succeeded because it made a great appliance for managing your calendar and address book. That jump-started the market, and all the additional stuff empowered by the OS came later.

iPhone succeeded, in my opinion, because it was the first device to make PC-style browsing work well on a smartphone. That killer feature bought Apple the time and market credibility it needed to enable native apps, fix the phone's problems, and add a raft of additional features that fleshed out the product vision.

Android succeeded (in part) because Apple stupidly left a void in the marketplace that Google could fill. In the wake of Steve Jobs' death, there has been a lot of well-deserved praise online for the brilliant decisions he made. But I think one of Steve's biggest mistakes ever was the decision to wed Apple exclusively to AT&T in the US for multiple years. That forced Verizon to find an iPhone competitor and market it aggressively. Verizon's choices were Windows Mobile (unpopular with customers, and a vendor with a history of shafting its partners), Nokia/Symbian (unpopular in the US, and a vendor with a history of shafting operators), or Google (sexy web brand, believed at the time to be open and non-controlling). People outside the US don't realize this, but in the US Verizon was the main marketing muscle behind the success of Android. It forced the product into the market and kept pushing for a long time, giving Google the time it needed to improve Android and get it past the crucial first release.

The Pre and TouchPad had no patient sugar daddy. And they had no breakthrough feature that would compel people to buy the first versions despite their inevitable flaws. I think Palm's product strategy was broken, and so Web OS was probably doomed no matter how well it was implemented.

The lesson: Who's your daddy, and what's your killer feature?

Two companies are working on new mobile platforms scheduled to ship in 2012: Nokia's next-generation Windows phones, and RIM's BlackBerry 10. In both cases, the press has been focusing on their development schedules. The schedules are very important, of course. But the real questions to ask are:

1. Do they have the financial backing to complete versions 2 and 3, which will be needed to fix the inevitable flaws in version 1? and

2. Will the products do anything unique and compelling that will cause at least some customers to prefer them even if they have other drawbacks?

I think Nokia can probably say yes to question 1; RIM is in doubt. And as far as I can tell, neither vendor has even started to address question 2. If they don't, in a year or two we'll probably be doing more post-mortems.

A New Survey on Information Management

2011-12-15T22:47:00.000-08:00

I'd like to interrupt the usual programming here to ask you a favor.

The startup I'm working on will ship its first product in 2012. As part of our development, we'd like to get some data on how people are affected by information overload. We hope our product will help with that problem, but we need to understand better how people feel about the problem and what they're doing about it today. So we're doing a survey.

I think that you, the folks who read Mobile Opportunity, are a very good cross-section of technology users, so I'd like to ask you to take the survey. I know you have much better things to do with your time than fill out a survey, but we could really use your help. It'll take about ten minutes, and it's almost all multiple choice. I'll share the results here, so you can learn more about your fellow readers and how you compare to them.

To go to the survey, click here.

Once our company gets closer to launching, I will start up a separate weblog to talk about the product. I'll also keep on writing Mobile Opportunity, with its current focus.

Thanks in advance for your help. I really appreciate it. And I'll have a new post for you next week. It's a pretty long one that I've been working on for a while.

Lessons From the Failure of Flash: Greed Kills

2011-11-10T18:04:00.001-08:00

Adobe's decision to stop development of mobile Flash has deservedly gotten a lot of attention online. It's a sad story for Adobe and Flash developers: a dominating standard on the PC web failed to get traction in mobile, and will now be abandoned gradually in favor of HTML 5. But the story's not limited to mobile -- without a mobile growth path, I think Flash itself is destined to become a dwindling legacy standard everywhere (link). I think the whole Flash business edifice is coming down.

How did Flash go from leader to loser? There are a lot of explanations being floated online. Erica Ogg at GigaOm has a good list (link):

--Mobile flash didn't work very well
--It was opposed by powerful people like Steve Jobs
--It was out-competed by HTML 5

(And by the way, how in the world do you get out-competed by something as slow-moving as HTML 5?)

I agree with Erica, but it's more a list of symptoms than root causes. It's like saying an airplane crashed because the wings fell off. Yes, that's true, but why did the wings fall off? If you look for root causes of the Flash failure, I think they go back many years to a fundamental misreading of the mobile market, and to short-term revenue goals that were more important than long-term strategy at both Macromedia and Adobe.

In other words, Flash didn't just die. It was managed into oblivion.

The story of Flash is a great cautionary tale for companies that want to create and control software platforms, so it's worth looking at more closely.

A quick, oversimplified history of Flash

In the software world, there is an inherent conflict between setting a broad standard and making money. If you have good software technology and you're willing to give it away, you can get people to adopt it very broadly, but you will go broke in the process. On the other hand, if you charge money for your technology, you can stay in business, but it's very hard to get it broadly adopted as a standard because people don't want to lock themselves into paying you.

Clever software companies have long realized that you can work around this conflict by giving away one technology to make it a standard, and then charging for something else related to it. For example, many open source software companies give away their core product, but charge for hosting and support and other services. Android is another example -- it's a free operating system for mobile phone manufacturers, but if you use it in your phone Google also tries to coerce you into bundling its services, which extract revenue from your customers.

In the case of Flash, the player software was given away for free on the web, and Macromedia (the owner of Flash at the time) made its money by selling Flash content development tools. The free Flash player eventually took on two roles on the web: it was the preferred way to create artistically-sophisticated web content, including an active subculture of online gaming, and it became one of the most popular ways to play video. Flash reached a point of critical mass where most people felt they just had to have the player installed in their browser. It became a de facto standard on the web.

Enter Japan Inc., carrying cash. The rise of mobile devices changed the situation for Flash. Long before today's smartphones, with their sophisticated web browsers, Japan was the center of mobile phone innovation, and the dominant player there was NTT DoCoMo, with its proprietary iMode phone platform. The folks at DoCoMo wanted to create more compelling multimedia experiences for their iMode phones, and so in early 2003 they licensed Macromedia's Flash Lite, the mobile version of Flash, for inclusion in iMode phones (link).

The deal was a breakthrough for Macromedia. Instead of giving away the flash client, the way it had on the PC, Macromedia could charge for the client, have it forced into the hands of every user, and continue to also make money selling development tools. The company had found a way to have its cake and eat it too! In late 2004, the iMode deal was extended worldwide (link), and I'm sure Macromedia had visions of global domination.

Unfortunately for Flash, Japan is a unique phone market, and DoCoMo is a unique operator. The DoCoMo deal could not be duplicated on most phone platforms other than iMode. Macromedia, and later Adobe, was now trapped by its own success. To make Flash Lite a standard in mobile, it would have needed to give away the player, undercutting its lucrative DoCoMo deal. When you have a whole business unit focused on making money from licensing the player, giving it away would mean missing revenue projections and laying off a lot of people. Macromedia chose the revenue, and Flash Lite never became a mobile standard.

Without fully realizing it, Macromedia had undermined the business model for Flash itself. The more popular mobile became, the weaker Flash would be.

Enter the modern smartphone. Jump forward to 2007, when the iPhone and other modern smartphones made full mobile web browsing practical. Adobe, by now the owner of Flash, was completely unprepared to respond. Even if it started giving away Flash Lite, the player had been designed for limited-function feature phones and could not duplicate the full PC Flash experience. Meanwhile, the full Flash player had been designed for PCs; it was too fat to run well on a smartphone. So the full web had moved to a place where Adobe could not follow. The ubiquity of the Flash standard was broken by Adobe itself.

To make things worse, Adobe was by then in the midst of a strategy to upgrade Flash into a full programming layer for mobile devices, a project called Apollo (later renamed AIR). The promise of AIR was to make all operating systems irrelevant by separating them from their applications. At the time, I thought Adobe's strategy was very clever (link), but the implementation turned out to be woefully slow.

So here's what Adobe did to itself: By mismanaging the move to full mobile browsing, it demonstrated that customers were willing to live with a mobile browser that could not display Flash. Then, by declaring its intent to take over the mobile platform world, Adobe alarmed the other platform companies, especially Apple. This gave them both the opportunity and the incentive to crush mobile Flash.

Which is exactly what they did.

The lesson: Don't be greedy

There are a couple of lessons from this experience. The first is that when you've established a free standard, charging money for it puts your whole business at risk. Contrast the Flash experience to PDF, another standard Adobe established. Unlike Flash, Adobe progressively gave up more and more control over the PDF standard, to the point where competitors can easily create their own PDF writers, and in fact Microsoft bundles one with ~~Windows~~ Office. Despite the web community's broad hostility for PDF, it continues to be a de facto standard in computing. There is no possible way for Adobe to make money directly from the PDF reader, but its Acrobat PDF management and generation business continues to bring in revenue.

The second lesson is that you have to align your business structure with your strategy. I think Macromedia made a fundamental error by putting mobile Flash into its own business unit. Adobe continued the error by creating a separate mobile BU when it bought Macromedia (link). That structure meant the mobile Flash team was forced to make money from the player. If the player and flash development tools had been in the same BU, management might have at least had a chance to trade off player revenue to grow the tools business.

What can Adobe do now?

The Adobe folks say the discontinuation of mobile flash is just an exercise in focus (link). They point out that developers can still create apps using Flash and compile them for mobile devices, and that Flash is still alive on the desktop. Viewed from the narrow perspective of the situation that Adobe faces in late 2011, the changes to Flash probably are prudent. But judged against Adobe's promise to create an "an industry-defining technology platform" when it bought Macromedia in 2005 (link), it's hard to call the current situation anything other than a failure.

I think it's clear that Flash as a platform is dying; the end of the mobile Flash player has disillusioned many of its most passionate supporters. You can hear them cussing here and here. Flash compatibility will continue to live on in AIR and other web content development tools, of course, but now that Adobe doesn't control the player, I think it will have trouble giving its tools any particular advantage.

What Adobe should do is start contributing aggressively to HTML 5, to upgrade it into the full web platform that AIR was originally supposed to be. That's a role no one in the industry has taken ownership of, web developers are crying out for it, and Adobe implies that's what it will do. But I've heard these broad statements from Adobe before, and usually the implementation has fallen far short of the promises. At this point, I doubt Adobe has the vision and agility to pull it off. Most likely it will retreat to what it has always been at the core: a maker of software tools for artistically-inclined creative people. It's a nice stable niche, but it's nothing like the dominant leadership role that Adobe once aspired to.

Amazon vs. Apple? No, it's Amazon and Apple vs. Everyone Else

2011-09-28T18:49:00.000-07:00

To me, there's something magnificent about a well-executed product strategy. Features and price and marketing all come together to delight a particular type of customer, and everyone wins. The developer gets to sell a lot of products, and the users get something that improves their lives.

In the tablet market right now we have the privilege of watching two companies do great strategy, Apple and Amazon. The press wants to label the Kindle Fire an iPad killer, but really it's the first sensible iPad counterpoint, a tablet device with its own unique design center and business model. I don't think either one's going to kill the other, but I think together they're likely to chop up almost every other company that gets in their way. In particular, that means Microsoft, RIM, and Google.

Let me start by talking about the new Kindle line, and then its likely impact on the market.

Two tablet paradigms

When Apple entered the tablet market, it asked "what can we do to redefine computing for tablets?" It re-thought the user interface, application model, and an endless set of other details to create a unique new computing experience. Apple has been rewarded with explosive sales growth.

With the Kindle line, Amazon asked a different question: "What can we do to redefine content distribution?" The answer led it to a tablet computer, but one with very different hardware specs, user experience, and a vastly different business model. None of the Kindles can match the iPad feature for feature (link), but they're not intended to. At $499 and up, the iPad is a serious investment for most people, a lifestyle statement. At $199 and down, the Kindles are impulse buys, the sort of thing people will get under Christmas trees or just buy for themselves because it looks neat and why the heck not?

Apple makes money from the sale of the iPad and its accessories, with a bit more coming from applications and content. Given the breath-taking pricing for the Kindle line, Amazon will probably lose money on the hardware, or at best break even. Its main profit will have to come from the sale of ebooks and movies and all sorts of other media products, plus some apps. Those revenues may take years to fully develop, so Amazon is playing a very long game. That's why I see Kindle as a strategy rather than just a product. The company is betting that by subsidizing the Kindle now, it can dominate electronic media distribution for the indefinite future.

To keep iPad successful, Apple will need to continue to add wonderful new features to it, constantly refreshing the "magical" experience. It will also continue to drive it into markets where tablet computing can make a big difference. Apple is already making a huge push in education; some people tell me Apple has almost completely refocused its education salesforce on selling iPad to schools rather than Macs. And there are plenty of reports of iPads moving into other verticals like aviation.

I'm sure the Kindle Fire will also show up in schools, but at heart the Kindle line is a Volkspad, priced to be the tablet thing that everyone eventually gets for basic content access. Already about 40% of tablet owners also own e-readers according to Pew Research (link), and I expect that percentage to increase.

Over time we might see Apple and Amazon compete more directly; it all depends on how much Apple is willing to subsidize hardware to get long-term revenue from content. There is also potential for product line conflicts -- if Apple makes a lower-priced iPad, it might cannibalize iPhone sales. In the past Apple has tried to keep its product lines separated in price, and it hasn't used the subsidy model. This is a very interesting test for Apple's new CEO Tim Cook, and I'm glad Steve Jobs is still on the scene to advise him.

But in the meantime, it's very likely that iPad and Kindle will coexist nicely in the market. The losers, I think, will be everyone else trying to play in the tablet space.

Hammer and Anvil

Companies trying to sell tablets against Apple were already suffering from slow sales. Now instead of just being pounded by the iPad hammer, they've been undercut by the Kindle anvil. For most of them, there's no place to go. It's very hard for me to picture how somebody like Samsung is going to get market traction with its current tablet line, and I think the RIM PlayBook, due to its size, is going to suffer against Kindle Fire. Between slow sales of its current phones and now the PlayBook's dwindling prospects, I hope RIM has been very very careful about managing its inventory of parts and finished devices. Otherwise it could end up with a massive inventory writedown in a couple of quarters.

I will be very interested to see what Barnes & Noble does next with its Nook Color tablet. Nook Color is similar in many ways to Kindle Fire, but B&N was reluctant to add a lot of Android apps because it was afraid people might buy it as a tablet rather than an e-reader. Amazon appears to have overcome this fear, and there's a danger that B&N may have let its opportunity for leadership slip away. On the other hand, if the next Nook Color has better features than Kindle Fire, Amazon's announcement might validate B&N's product and help it sell.

And then there's Microsoft, which has a beautiful-looking new Windows 8 tablet interface coming maybe late next year. I'm excited, I hope it'll be wonderful, but I'm starting to wonder if any customers will still be available by the time it ships.

There is still plenty of room in the market for competing tablets, but they'll need to be aimed at different usages than the iPad and Kindle. The biggest opportunity is for a stylus-equipped business productivity tool, an info pad (link). But none of the major hardware companies are working on that; they seem to prefer to bash their brains out competing directly with the iPad.

You're not the licensee Droid is looking for. Google's reaction to Kindle Fire speaks volumes about its goals for Android. Kindle Fire is based on Android, and will run Android applications. Android has been struggling in the tablet space, so you'd expect that Google would be delighted to have Amazon on the Android bandwagon. But you'd be wrong. Let's look at the press release Google issued today to welcome Amazon to the Android family. Wait a minute, there is no press release. Okay, so let's look on the Google blog. Nothing at all. Maybe a tweet from Andy Rubin? Dead silence.

The problem is that Amazon is using Android as just an OS, not using the Google-branded services and application store that Google layers on top of the OS (link). Although Google touted the openness of Android when it was first launched, the reality is that Google is using it as a Trojan horse to force its services onto hardware. What Amazon did with Android is very threatening to Google, and so you're not likely to hear a lot of supportive words from them.

Silken dreams. Speaking of threats to Google, we should discuss Amazon's new Silk browser. It supposedly integrates Amazon Web Services with the browser to produce a faster, more efficient browsing experience on Kindle Fire. Given the inefficiencies of web browsing over the wireless networks, this is potentially a compelling innovation that also might make it possible for future Amazon tablets to browse over 3G networks using less bandwidth than competing devices. That might lock in a structural cost advantage for Amazon's tablets.

Kindle Fire today is a WiFi only device, but I'd be very surprised if we didn't see a 3G version sometime in 2012.

Silk potentially gives Amazon a very powerful position (link). I can picture a couple of ways it could be used to disrupt the mobile market. First, Amazon could tie the browser to its own content services and distribute it to other hardware vendors. Basically, it could try to make Silk the content layer on Android that Google wants to be. This could be a good business move for Amazon, since it's not making money from the hardware anyway.

Google would hate this passionately, but with the company already under antitrust scrutiny, it would have to respond very carefully.

Amazon's other play could be to expand Silk into an enhanced platform for mobile web apps. I've been waiting for someone to make web apps work properly on mobile, and many smart people have been getting more and more depressed about the lack of leadership in mobile web APIs (link). Amazon has the expertise and the incentive to fill that gap. The question is whether it wants to. I think it should, I hope it will. If it does, Silk could become the platform for the next great generation of applications, giving Amazon enormous power in the computing market.

This will be a fun space to watch. Apple and Google will both feel pressure to respond to Silk to prevent Amazon from getting a decisive lead in mobile web apps. Maybe just the threat of Silk will be enough to finally drive some innovation in the mobile web platform.

I may be indulging in wishful thinking, but there's a possibility that ten years from now we'll look back on Silk as the single most important thing in today's announcement.

Or not. It depends on what Amazon's agenda is, and they're not telling.

Slouching toward Bethlehem. One revolution I'm sure is coming is the remaking of the print publishing industry. As I've said before (link), once about 20% of the reading public has electronic devices, an established author can make more money bypassing print and selling direct through e-readers. I think the new Kindle line, and especially the entry-level Kindles at $99 and below, will finally push us past the 20% threshold. It will take a couple of years to play out, but this will force the long-awaited restructuring, or destruction, of the traditional book publishing industry.

(Note: I wrote this before I read John Gruber's take on the new Kindles. He and I are thinking along similar lines. link )

Happy Birthday, Business Computing

2011-09-04T21:36:00.000-07:00

September 5, 2011

On this date sixty years ago, September 5 1951, the world's first business computing program was first tested on the world's first business computer, the Lyons Electronic Office (link).

LEO was inspired by wartime computers that calculated things like artillery aiming tables for the military. Lyons was a massive restaurant chain in the UK, and realized that the new digital computers could simplify its human-driven accounting operations. So it built its own computer, consisting of 21 racks with 6,000 vacuum tubes and occupying about 5,000 square feet. The company's first use of LEO was to calculate the cost of all the baked goods produced by its 12 bakeries (link).

From that humble beginning...wait, that wasn't a humble beginning at all, it was a very cool beginning. The first use of a business computer was to solve a real-world problem faster and more accurately than people could do it on their own. That's exactly what you're supposed to do with computers. LEO was quickly adapted to other tasks, where it achieved impressive results. For example, it cut the time needed to calculate an employee paycheck from eight minutes to 1.5 seconds.

It's hard to believe that many people believed for years that computers didn't increase business productivity (link).

From that very auspicious start grew most of the computing industry we know today (link). So take a moment to contemplate that dinner roll or slice of pie you eat today, and say a quiet thank-you to David Caminer, John Pinkerton (link), and the other pioneers who got it all started sixty years ago today.

More about Lyons
More about LEO

The Two Most Dangerous Words in Technology Marketing

2011-08-31T13:45:00.000-07:00

"Just wait."

So powerful. So easy to say. So appealing when your current products are behind the curve, and the press and analysts are beating you up about it. You can shut up the critics instantly if you just drop a few hints about the next generation product that's now in the labs.

So dangerous.

The phrase "just wait" ought to be locked behind glass in the marketing department, like a fire extinguisher, with a sign that says, "Break glass only in emergency." And then you hide the hammer someplace where no one can find it.

Saying "just wait" is dangerous because it invites customers to stop buying your current products. You're basically advertising against yourself. If your company is under financial or competitive stress, the risk is even greater because people are already questioning your viability.

This danger is especially potent in the tech industry (as opposed to carpeting or detergent) because tech customers worship newness, and they use the Internet aggressively to spread information. One vague hint at a conference in Japan can turn into a worldwide product announcement overnight.

This danger has been well understood in the tech industry dating at least back to 1983, when portable computing pioneer Adam Osborne supposedly helped destroy his PC company by pre-announcing a new generation of computers before they were ready to ship (link). Palm reinforced the lesson in 2000 by pre-announcing the m500 handheld line and stalling current sales (link).

But maybe memories have faded, because we've been hearing "just wait" a lot lately:

--Nokia announced that it's switching its software to Windows Phone, and promised new devices based on the OS by this fall. Nokia executives have hammered that message over and over, even making detailed promises about features including ease of use, battery life, imaging, voice commands, cloud services, and price (link). Some execs have even told audiences that they have a prototype in their pockets, but coyly refused to show it (link). What's the thinking here? Does refusing to show the product somehow nullify the fact that you just told everyone not to buy what you sell today?

--In February 2011, HP pre-announced a series of new smartphones that were supposed to come out over the next year. The most attractive-sounding one, the Pre3, was supposed to ship last. Not only did this obsolete HP's current products, but it also overshadowed the other new products HP launched in the interim. HP's interim smartphone sales turned out to be so bad that it killed the business before the Pre3 could even launch in the US.

--Speaking of HP, the company just announced that it will be selling its PC business because it's not doing well. As Jean-Louis Gassee pointed out, that's like inviting customers to switch to another vendor who actually wants to be in the business (link). That forced HP executive Todd Bradley to boost confidence by going on tour pre-announcing himself as future CEO of the theoretical spun-out company, even though HP's Board won't even meet to decide on a spinout until December (link).

--RIM announced that it's moving BlackBerry to a new operating system, which will apparently not run on its existing smartphones. It has spent much of the last year telling people how great all the new features of the OS will be. The company also pre-announced that it will enable Android applications to run on its future phones. Meanwhile, market share of its current products has been dropping steadily. The latest rumors say RIM's new phones will not be out until Q1 of 2012 (link), meaning the company has probably sabotaged its own Christmas sales for 2011.

--Microsoft announced that it's replacing Windows in about a year. That's not necessarily a problem, since it says the new version of Windows will run on existing hardware. But Microsoft also said it's introducing a new development platform based on HTML 5. This set off a huge amount of teeth-gnashing among today's app developers worried that their skills are about to become obsolete (check out the excellent overview by Mary-Jo Foley here).

Why are companies doing this over and over? Sometimes you have no choice. For example, Nokia couldn't lay off the Symbian team without saying something about its OS plans. However, it didn't have to be so noisy about the plans, so I think that wasn't its only motivation.

Sometimes the cause is a mismatch between the needs of a hardware business and the needs of a software business. If you're making a software platform, you pre-announce it as early as possible to build confidence and get developers ready at launch. But if you're selling hardware, you want to keep new stuff a secret until the day you ship. When you mix hardware and software, you are pulled in both directions. I think that disconnect probably affected Nokia, which is now run by a CEO who worked in software for most of his career.

Companies also sometimes pre-announce products because it placates investors. Wall Street analysts always ask what you're developing in the future, and executives sometimes can't resist the urge to tell them and prop up the stock price. Ironically, this may help the stock for a quarter, but often has the long-term effect of hurting a company's value when the pre-announcement slows sales. But each CEO always seems to believe he or she will be the one who gets away with it. I believe investor pressure was one of the drivers when Palm pre-announced the m500, and I believe it also explains some of the pre-announcements by HP and RIM.

Sometimes internal company politics also plays a role. An executive may pre-announce a product in the hope that the announcement will put more pressure on the development team to deliver "on time." Or a business leader will pre-announce something to pre-empt internal competition from another group. I've seen both of those happen at places where I worked. Needless to say, any company that allows internal politics to drive external communication has much bigger problems than its announcements policy.

Pre-announcements also create other problems. They educate the competition about what you're doing, and give them time to prepare a response. This is especially dangerous if you're trying to come from behind, which is usually the situation when a company pre-announces. So a competitor is already out-maneuvering you, and now you're giving them more notice of your plans?

But I think the worst effect of a pre-announcement is that it invalidates any signals you get from the market. You can't actually tell if your underlying business is healthy or not. Did HP's smartphone sales slow down because people hated its products, or because HP had invited customers to wait for the new ones? Have BlackBerry sales been suffering because customers don't want them, or because RIM invited people not to buy? Was the enormous drop in Nokia smartphone sales due to flaws in the products, or due to Nokia's relentless promotion of new phones that aren't yet shipping?

There's no way to tell for sure. And so, if you're running one of those companies, you don't know whether or not you should panic -- or more to the point, what exactly you should panic about. You have now trapped yourself in limbo, and there is no way out until your new products ship.

So, as you can guess, I am generally against pre-announcements. But they can be very powerful, and there are a couple of special cases in which they're appropriate.

When it's safe to pre-announce

If you're entering a new business. If you don't have any current sales to cannibalize, it's relatively safe to pre-announce. You're still alerting the competition, which I dislike, but at least you won't tank your current business. Apple pre-announced the first iPhone and iPad before they shipped, but you'll notice that they've been very secretive about the follow-ons.

A variant on this is when a competitor is ahead of you in a new category and you want to slow down their momentum. You pre-announce your own version of their product, in the hope that customers will wait to get it from you rather than buying from the competition. This can be especially effective in enterprise markets, where IT managers tend to develop long-term buying relationships with a few vendors. IBM used this technique relentlessly during the mainframe era, and Microsoft picked up the habit from them.

Pre-announcements are less effective against competitors in consumer markets, where people are sometimes driven by the urge to buy now. They also don't do much in cases where it's easy to switch vendors. For example, Google pre-announcing a web service isn't likely to stop people from using competitors to it in the interim. A pre-announcement can intimidate venture capitalists, though, and I wonder if Google doesn't sometimes announce a direction in order to hinder a potential competitor's ability to raise money.

If there is a seamless, zero-hassle upgrade path. If customers will be able to move easily to your new products, without obsoleting what they use today, and without big expense, a pre-announcement can be safe. For example Apple generally pre-announces new versions of Mac OS, and it's not a major problem because currently-available Mac hardware can run the new OS. Where RIM went wrong with its OS announcement is that its current hardware apparently can't run the new OS. So RIM has announced the pending obsolescence of everything it sells today.

If you are messing with the mind of a competitor. Theoretically, if you're dealing with a competitor who's very imitative, you can make them waste time and money by leaking news of future products that you don't actually plan to build. The competitor will feel obligated to spin up a business unit to copy your phantom product, leaving less money to respond to what you're actually doing.

When I was at Apple, we used to joke that we could waste $20 million a pop at Microsoft by seeding and then strenuously denying rumors that we were working on weird but plausible products. Handheld game machines, anyone? Television remote controls? Apple today is so influential that it could manipulate entire industries by doing that, not just individual companies.

But when you do this you gradually erode your credibility with your customers. If the rumor is plausible enough to dupe a competitor, it will also dupe some customers, who will then be disappointed when you don't deliver. Eventually you won't be able to get customers excited when you announce real products. Look at the skepticism people often express today when Google announces a new initiative.

The most famous case in which misdirection supposedly worked was not in business but in international politics. Some historians say that the collapse of the Soviet Union was hastened by the huge investments it made trying to keep up with Reagan Administration defense initiatives, some of which had no hope of actually working, but which still seemed plausible enough that the Soviets felt obligated to cover them.

I'm not so sure that really caused the collapse of the Soviet Union; big economic changes are usually driven by big economic forces, not by tactics. But more to the point, you're not Ronald Reagan, this isn't the Cold War, and if you try to pull off a fake this complicated you'll probably just confuse your customers and employees.

So unless you're entering a new market, or have a seamless low-cost upgrade path to the new product, your best bet is to grit your teeth, shut up, and next time plan better so you'll be ahead of the market instead of playing catch-up.

Thanks, Steve

2011-08-24T18:26:00.000-07:00

I've never even met you, but I wouldn't have my career if not for you. So I thought this would be a good time to say thanks.

It was the Macintosh computer you championed that first drew me into developing software. That business didn't make me rich, but it eventually got me hired by Apple. Unfortunately, you left a year before I got to Apple, but the company's goals were still the things you preached -- do something insanely great, change the world.

I spent ten years at the company you co-founded, and it was both a great education and a fun ride. Unfortunately, in a case of spectacularly poor judgment, I quit in early 1997, after the NeXT acquisition but before you took back control of the company. I didn't believe you'd take over, and I lost faith in the previous management. My only contact with you was a single meeting that you and I both attended. I was there as an observer, so I sat in the back and said nothing. My only impression of you was, "wow, he really doesn't wear socks."

Perhaps it's just as well that I quit.

Although I was no longer with Apple, you still played a huge role in my career. For a time in the late 1990s, it looked like Silicon Valley was becoming a backwater in technology. Software was dominated by Microsoft after its demolition of Netscape, AOL on the east coast was the online leader, and Dell in Texas plus the Asian companies were the leaders in PC hardware. The Valley's leadership role was saved, I believe, by Yahoo and Google in the web world, and by Apple's resurrection in computer systems.

Other people are doing a great job of recapping all of Apple's product successes since your return, so I won't bother repeating them here. But I want to talk about two other accomplishments that stand out to me. The first is how you've reset the way the tech industry looks at consumer products. Even a few years ago, most people still said that Microsoft's business model -- in which the hardware was designed separately from the software -- was the only viable way to make computing devices. Today, everyone talks about codeveloping hardware and software, and it's because of you.

The other accomplishment that stands out to me is your creation of an organization at Apple that could turn out hit after hit, reliably and with great quality. Most people don't appreciate how hard that is, mostly because Apple makes it look so easy.

It's because of the organization you built that I'm confident Apple will continue to do well, even as you reduce your role. I hope your health will improve, and it would be great to see you back as CEO some day. But that's speculation for another time.

Right now, I just wanted to say thanks, Steve. It was insanely great, and you did indeed change the world.

I'm Speaking at Mobile 2.0

2011-08-21T23:11:00.000-07:00

FYI, I'll be speaking on a panel at the Mobile 2.0 conference September 1, 2011 in San Francisco (link). The panel is about native apps vs. web, and should be a lot of fun, especially since Marc Davis is also on the panel. He's a great thinker and speaker.

The Mobile 2.0 folks have offered a discount to Mobile Opportunity readers. If you register using the code "TwentyFive" you'll get a 25% discount.

The Part of Palm that Smartphone Companies Should be Bidding For

2011-08-19T00:13:00.000-07:00

Anytime a CEO gets ousted in disgrace, his or her pet projects are vulnerable to a quick trip to the gallows if they falter. Mark Hurd was the CEO who bought Palm, so it was at risk from the moment Hurd left. HP's mobile device performance had not been good this year -- the Veer smartphone launched and vanished on the same day, and the TouchPad turned out to be a sales disaster. If Leo Apotheker had chosen to invest further in the business, it would have turned into his responsibility. It's far easier to just walk away.

You can make an argument that HP should have given the business more time, and it's a shame that we'll never get to see the Pre 3. But Palm's sales have been troubled for years, and I think its fundamental mistake was that it tried to be too much like Apple. From the start, Pre was aimed at the same users and the same usages as the iPhone (even down to a failed effort to tie the phone directly to iTunes). HP proved that most people don't want to buy an incremental improvement to the iPhone that can't run iOS apps.

Then just for kicks, HP went and proved the same point again with the TouchPad.

The lesson to other mobile companies, I think, is that unless you're a low-cost Asian vendor, you need to differentiate from Apple, not draft behind it.

I'd love to see Web OS live on, but the hardware debacle makes that less likely. As I mentioned the other day, licensees choose an OS because they think it'll generate a lot of unit sales for them. Since Web OS couldn't do that for HP, who else would want to license it?

If you believe that every smartphone company needs to own its own OS, we ought to see a mad bidding war between LG, HTC, Sony Ericsson, Dell, and maybe Samsung to buy Web OS. (The loser could get RIM as a consolation prize.) Maybe a buyout will still happen, but I think HP has probably been quietly shopping Web OS for a while, and if there were interest it would have tried to close a deal before today's announcement.

(By the way, HTC, if you do buy Web OS, you should insist that HP give you the Palm brand name as well. It's still far better known than the HTC brand in the US. The same logic applies for LG.)

But I'm not persuaded that buying an OS is the right way to go for any smartphone company. Turning yourself into a second-class imitation of Apple isn't a winning strategy, especially if your company doesn't know how to manage an operating system. (Case in point, look what it did to HP.) You can create great mobile systems without controlling the OS; all you need is a great system development team and the freedom to put a software layer on top of whatever OS you use.

That means the real crown jewel in the Web OS business unit is the system development people -- the product managers and engineers -- that HP just threw in the garbage. In my opinion, that's the part of Palm that smartphone companies should be fighting for.

Google and Motorola: What the #@!*%?

2011-08-16T23:39:00.000-07:00

It's two days later and I'm still confused. When I saw the headline yesterday, my jaw literally dropped. "Google bought who? That's got to be a misprint. They must have bought a mobile operator, like Sprint or something. But Motorola? Really?"

Usually when a big tech merger happens you can see the logic behind it. Even if you don't agree with the logic, you understand why they made the deal. But in this case the more I think about it the more confused I get.

Did Google buy Motorola for the patents? If so, why isn't it spinning out the hardware business? Or did Google buy Motorola because it wants to be in the hardware business? If so, does it understand what a world of other problems that will create for Android and the rest of Google? Seriously, if Google tries to integrate Motorola into its business we could end up citing this as the deal that permanently broke Google.

Why roll the dice like that? Maybe I'm missing something, maybe Google has a screw loose, maybe both of the above. Or maybe I'm wrong to look for airtight logic. Companies sometimes make decisions on impulse, especially when they are under stress, and it's a sure thing that Google is under stress these days on IP issues.

So I have a lot more questions than answers. My questions are about Google's intent, its next steps, and how other companies will react...

Why did Google do it, really? The conventional answer is that Google wanted Motorola Mobility for its patents. That's what Google itself implied, and Marguerite Reardon over at CNET agreed (link). That might well be the explanation. Om Malik had a really intriguing take: Google bought Motorola as a defensive move to prevent Microsoft from getting the Motorola patents (link). And Richard Windsor of Nomura, who I respect deeply, said in an e-mail that this is all about the patents. He predicts that Google's new patent portfolio will create a balance of power enabling Google to quickly force a settlement to the patent lawsuits against its licensees.

But if you wanted only the patents, I think you'd buy Motorola, keep the patents and then spin out the hardware company to avoid antagonizing your licensees. Google says it intends to keep Motorola and run it.

Besides, as Andrew Sorkin pointed out in the New York Times, Google could have bought a different but also important mobile patent portfolio from InterDigital for about $10 billion less than Motorola (link). Maybe there's some magic patent at Motorola that Google feels is worth $10 billion more, or maybe there are some terms in Motorola's patent cross-license agreements that Google desperately needs. But again, if that's the case, why not keep the patents and resell the hardware business?

Unless Google is lying about keeping Motorola intact, I think Google intends to be in the mobile hardware business. Which raises the next question...

Does Google know how to run a hardware business? No, of course not. The processes, disciplines, and skills are utterly different. The same business practices that made Google good in software will be a liability in hardware. Google's engineers-first, research driven product management philosophy is effective in the development of web software, because you can run experiments and revise your web app every day in response to user feedback. But in hardware, you have to make feature decisions 18 months before you ship, and you have to live with those decisions for another 18 months while your product sells through. You can't afford to wait for science. Instead, you need dictatorial product managers who operate on artistry and intuition. All of those concepts (dictatorship, artistry, intuition) are anathema to Google's culture. Either Google's worldview will dominate and ruin Motorola, or worse yet the Motorola worldview will infect Google. Google with Motorola inside it is like a python that swallowed a minivan.

To put it another way, I think Google has about as much chance of successfully managing a device business as Nokia had of running an OS business.

But the real question is, does Google realize that it doesn't know how to make hardware? I doubt it. Speaking as someone who worked at PalmSource for its whole independent history, an OS company always believes that it could do a better job of making hardware than its licensees. It's incredibly frustrating to have a vision for what people should do with your software, and then see them screw it up over and over. The temptation is to build some hardware yourself, just to show those idiots how to do it right.

I think maybe Google just gave in to that temptation.

But if Google really wants to sell hardware, that raises questions for the other Android licensees...

How will Google really manage Motorola? Google says it's going to treat Motorola as an independent company without any special access to the Android team. But what's the point in that? Motorola hasn't exactly been dominating the mobile device world lately, so I find it very, very hard to believe that Google would buy it and leave it intact. Wouldn't you want to have Motorola create special products that take advantage of the latest Android features? Kind of like a flagship operation? Then when you announce a new initiative at Google IO, you can have some nice new Motorola hardware ready to ship with it on day one. Of course, the other Android licensees will be allowed to participate too. They're welcome to run flat out to keep up with every Google software initiative, disregarding expense and business risk, just like Google's Motorola subsidiary will.

Which makes you wonder...

How will the Android licensees react? I think we can safely disregard the positive quotes from the other Android licensees. What would you do if your company depended utterly on Android, and Google called you up twelve hours before the announcement and asked for a quote? Would you risk Google's anger by refusing to give a nice quote? Of course not.

But would you honestly be happy? Of course not. In the last year, you gained share at the expense of Motorola. Now instead of being a weak and failing vendor you can snack on, Motorola has infinite financial resources and cannot physically go broke. Sure, I am happy to compete with that.

The other issue is the one everyone else has already pointed out -- even though Google says there will be a firewall between Motorola and Android, you suspect it'll be semi-permeable, meaning you'll always be at a bit of a disadvantage.

So what do you do? A lot of people are predicting that Android could be in danger of losing licensees. For example, Horace Dediu at Asymco drew a parallel to the Symbian consortium, whose members were uncomfortable because Nokia held the largest share of the ownership (link). But when Symbian was launched, those companies were happy to sign up, despite the asymmetric ownership, because they thought Symbian was going to dominate the mobile OS market, and they were scared of Microsoft. They dropped out only after it was proven conclusively that only Nokia was capable of making a Symbian phone that sold well in Europe.

I can tell you from personal experience at Palm that licensees don't care about governance issues when they think your OS will help them sell a lot of units. It's only after growth slows down that they get twitchy. As long as Android continues to grow explosively, the licensees will be right there with it because they're terrified not to be.

Google probably knows the licensees can't go anywhere. In fact, it has a history of treating them very roughly in private (check out the nasty tone in the private memos between Google and Samsung exposed by the Skyhook lawsuit here). So in some ways the Motorola deal is just more of the same.

But there is still a risk to Google. Android licensees will probably be more willing to talk to Microsoft now, and they might do a few more Windows Phone products, if only to get leverage against Google. So Google has just thrown a lifeline to Windows Phone, which otherwise might have been headed for extinction if the first round of Nokia products failed.

This might also be an opportunity for other mobile platforms. If there were any...

Is there a third path? The Android licensees are probably pretty wary of both Google and Microsoft at this point, and may be wishing forlornly that there was a third alternative for mobile operating systems.

Unfortunately, I don't think there is. The handset vendors' embrace of "royalty-free" Android strangled the other Linux mobile platforms. TrollTech was bought by Nokia and then killed, while Access's evolution of Palm OS died for lack of customers.

There's speculation that HP might broadly license Web OS (link). But HP has its own hardware conflict of interest (a much stronger one than either Google or Microsoft). Far more importantly, keep in mind that mobile phone companies license an OS because they believe it's going to sell millions of units for them. If HP, with all of its resources and channel presence and strong brand, can't sell significant numbers of Web OS phones, why would HTC or Samsung believe they could do it?

[Edit: In the original version of this post, I failed to mention MeeGo. A couple of people have told me that was unfair, and I think they are right. Based on past experience, I have a lot of skepticism about OS consortia, especially ones involving Intel. But if MeeGo's ever going to get serious consideration from hardware companies, now is the time, and I should have acknowledged that.]

Hint to Android licensees: If you build up HTML 5 as a platform, you won't have to depend on anyone else's platform. But in the meantime, your realistic choices are Android and Microsoft.

Speaking of Microsoft...

What will Microsoft do now? Steve Ballmer faces a very interesting decision. Windows Phone just got a boost because it's now seen as a more vendor-neutral platform than Android. The door is probably open for Microsoft to build deeper relationships with Android licensees. If Microsoft sill believes in its licensing model, it will focus on walking through that door.

But as others have pointed out, Microsoft's position is now a bit lonely in some ways. The other major smartphone platforms (iOS and Android) now have captive hardware arms. Even RIM has both hardware and OS, although it's been a while since RIM was held up as a model for others to emulate. Will Microsoft feel exposed without its own hardware business? And if it does feel exposed, will it buy Nokia?

I'd be very surprised if it did. Buying Nokia would decisively end the Windows Mobile licensing business. You'd be betting Microsoft's mobile future even more completely on the ability of Nokia to execute in hardware. Besides, why buy the cow when you're already milking it?

I'd also like to think that Microsoft learned from the Zune debacle that it's not great at creating mobile hardware.

And then there's the fruit company...

What will Apple do? Apple's history since Steve returned is that it doesn't react to competitors; it forces competitors to react to it. Apple is brilliant at setting the terms of the competition so other companies are forced to compete on Apple's turf. Everyone else is focused on building licensed commodity hardware, so Apple creates integrated systems. Everyone else has optimized their supply chains to sell through third party retailers, so Apple creates its own stores. Everyone else stopped making touchscreen smartphones, so what does Apple make?

You get the picture. So I don't expect Apple to make any changes in response to the Motorola deal, but I would be shocked if Apple didn't have plans for changing the terms of the competition again now that Google is trying to build more integrated hardware and software. There are all sorts of game-changing moves Apple could make -- do a much larger push in web services, create an iPhone Nano (fewer features and lower price), even create its own search engine or social network (potentially valuable just to make Google crazy).

What's next?

To sum it all up, it's impossible to predict what will happen. Hopefully the new balance of power in patents will make the big lawsuits go away, although I doubt we'd see a resolution before the deal closes, and that could take many months. If Google bought Motorola for the patents, it'll either sell the company or let it gracefully rot, and we'll go back to business as usual.

On the other hand, if Google tries to integrate Motorola into its business, that's a noble mission, and I hope they'll succeed because the mobile industry needs more competition to Apple in systems design. I dearly hope Google will take the challenge seriously and recognize that it'll need to make fundamental changes to its culture. But those changes would be daunting even for a company experienced in mergers, and Google's never done a deal this big before. I think the most likely outcome of the Google-Motorola merger is some flavor of train wreck.

I hope I'm wrong.

The Case for Software Patents

2011-08-10T23:54:00.000-07:00

It's become popular lately to call for the elimination of software patents. Tim Lee at Forbes sounded the call last month (link), and this week Mark Cuban joined the chorus (link):

"Because of software and process patents any company could be sued for almost anything. It is impossible to know what the next patent to be issued will be and whether or not your company will be at complete risk. It is impossible to go through the entire catalog of patents issued over the last 10, 15, 20 years and determine which will be used to initiate a suit against your company."

I have a ton of respect for many of the people arguing against software patents, but I disagree strongly with their arguments. I think software patents play an important role in encouraging innovation, especially by small companies. The loss of them would make it harder for small companies to survive, and would discourage fundamental innovation in software.

The online debate about software patents is very contentious, and much of it focuses on philosophical issues like the nature of software and whether that's inherently patentable. The debate also often gets mixed with the contention that all software should be free. I'm not going to get into either topic; the arguments are arcane, sometimes quasi-religious in their fervor, and besides they've already been debated to death online.

What I want to focus on is the broader issue of the economic role of patents and how that applies to software. The patent system is designed to encourage innovation by giving a creator a temporary monopoly on the use of an invention. Does that mechanism work in software? What are the problems? And what's the best way to fix them?

When you take that perspective, I think it's clear that there are some genuine problems with software patents. (Actually, there are problems with patents in general, and software is just the most prominent example.) But I think there are better ways than a ban to solve those problems. To me, banning software patents to solve patent problems would be like banning automobiles to stop car theft. The cure is far worse than the disease.

The value of software patents

Let me start with a personal example. As I've mentioned before, I'm working on a startup. When we brief people on what we're doing, one of the first questions we get is, "how will you prevent [Google / Apple / Microsoft / insert hot web company here] from copying you?"

A big part of the answer is, "we've filed for a patent."

A patent isn't magic protection, of course. It might not be granted, and even if it's granted, patents are difficult to enforce against a really big company. But it reassures investors, and more importantly if a Facebook or Google wanted to copy our work, the patent makes it safer and quicker for them to buy our company rather than just ripping us off. So it helps to protect the value of our company.

Without the patent, I think it could be open season on us the moment we announce our product.

Advocates of eliminating software patents say there are other ways to protect software companies. The first is that software can be copyrighted. That's technically true, but the only thing copyright protects you from is word for word theft of your source code; it does not protect inventions. For most software innovations, copyright is no protection at all.

The second argument is that small companies should move quickly, so the big companies can't catch up with them. The idea is that if you move fast enough, you won't need patents. I think there's a consumer web app bias in that advice -- it works best for small apps that can be adopted quickly, or that have a strong social effect (so the user base is part of your competitive protection). It doesn't work well for software tools that have a slower adoption curve. The more complex and powerful the software, the slower the adoption cycle. This is especially true for enterprise tools. Without patents, those companies are exquisitely vulnerable to being ripped off soon after they launch, when they're just starting to gain word of mouth.

So for companies creating new categories of software, and especially for enterprise software tools, I think patents remain the best (and really only) protection from theft.

But what about the damage being caused by abuse of the patent system? If we keep software patents, are we then endorsing those abuses?

I don't think so. In the articles I've seen, there are two primary arguments for eliminating software patents: Trolls and patent warfare. They need to be discussed separately.

Discouraging patent trolls. The troll problem is something we all know about: patent licensing companies buy large collections of patents and then extort fees from companies that had no idea they were violating the patents. That's the core of the problem Mark Cuban was talking about above, and it is outrageous. These surprise lawsuits can have a devastating effect on smaller companies that can't afford to hire a lawyer to defend themselves. Even if you're in the right, it can be so expensive to defend yourself that you just have to give up and pay the license fee. That definitely has a chilling effect on innovation, it is contrary to the intent of the patent system, and therefore it needs to be restrained.

But I think the answer in that case is not to eliminate software patents; it's to restrict the right of "non-practicing entities" (patent trolls) to sue for patent infringement. That would still have a financial effect on small companies -- in the case of my startup, it would make it harder for us to sell our patent if we wanted to. But patent law exists to protect the process of innovation, not to protect inventors for their own sake. If you can't put your patent to good use, you aren't contributing to the public good and you shouldn't get the same level of protection as a company that has built a business around a patent.

Patent warfare is a very different issue. Several large tech companies are using patent lawsuits to slow down competitors and pull revenue out of them. Eliminating software patents would not stop these wars; they're also based on hardware patents, antitrust law, and any other field of law that the companies can apply. It's like one of those cartoon fights in a kitchen where a character opens up a drawer and throws everything inside it.

Yeah, like that.

The underlying problem here isn't about patents; it's about the use (and abuse) of the legal system as a competitive tool. I've had more involvement in tech industry legal wars than I want to think about: I gave depositions in the Apple-Microsoft IP wars, and I testified in Washington in the Microsoft antitrust lawsuit. The overall experience left me plenty cynical about the legal system, but it also persuaded me that big tech companies are perfectly capable of taking care of themselves in court. They do not need our help. You should think of lawsuits as just another way that tech companies express love for one-another.

I'm somewhat sympathetic to the Android vendors being sued by Apple, but a lot of it is their own fault. HTC in particular has no one to blame but itself for its situation, in my opinion. HTC was one of the first companies in mobile computing, creating PDAs for Compaq and early smartphones for Orange and O2. I've got to believe that if HTC had been thinking clearly about patents, there are a lot of fundamental mobile inventions it could have patented. Then it would have had a big enough patent portfolio to force a cross-licensing deal with Apple.

The same thing goes for Google. When it decided to enter the mobile OS business, it should have expected that it would end up at war with Apple and Microsoft (heck, anyone could have predicted that). Google should have bought up a big mobile patent portfolio (like maybe Palm's) back when they were inexpensive.

Are we obligated to change the patent laws just because Google and HTC were careless? No. Is it in the public interest for us to intervene anyway? I doubt it. Here's how the mobile patent wars will play out: The big boys will do a whole bunch more legal maneuvering, they'll scream bloody murder, and in the end one of them will write a check to the other. Then they'll all go back to work.

My advice: If it bothers you, stop reading the news stories about it. Or sit back and enjoy it as theatre. It's hardly an important enough issue to justify stripping the patent protection from every small software company in the US.

A world without software patents

If you want to understand the importance of software patents, go back and talk to the first people who patented software. That's what I did. Two years ago, I corresponded with Martin Goetz, holder of the first software patent (link).

Goetz was a manager at Applied Data Research, one of the first independent app companies in the 1960s. ADR made applications for mainframes, and IBM copied and gave away a version of ADR's Autoflow application (the first commercially marketed third party software app). ADR might have been wiped out, but it had patented Autoflow, and it was able to successfully sue IBM. That lawsuit, plus a related one by the US government, laid the foundations of the independent software industry by forcing IBM to stop giving away free apps for its mainframes.

The lawsuits involved a lot of legal issues, including antitrust, so you can't say that software patents alone led to the birth of the software industry. But I think it's clear that patents helped codify the value of software independent from hardware. If that value hadn't been recognized, the antitrust suit would have been meaningless because there would have been no damages.

So antitrust and patent law have worked together to help protect software innovation. Antitrust helped to restrain big companies from giving away free competitors to an app (although that protection has eroded lately), while patents restrained big companies from copying apps directly. It's like a ladder. If you pull out either leg, I worry that it won't stand.

In his online memoirs (link), Goetz makes the case that application innovation was slow and unresponsive to users in the decade before software patents, and accelerated dramatically in the decade after. I agree. That is exactly the sort of innovation that patent law was meant to encourage, and so I view software patents as a success.

Without software patents, I think it would be far too easy to go back to the bad old days when the big computing companies walked all over small software companies, the software industry consisted of only consultants and custom developers, and software innovation moved at a much slower pace.

_____

More reading: Software entrepreneur and investor Paul Graham wrote a nuanced and detailed take on the subject here. Some of his conclusions differ a bit from mine, but the essay is well worth reading.

Quick Takes: Logitech's Misstep, Nokia's New Names and Fonts

2011-08-03T18:54:00.000-07:00

Short thoughts on recent tech news...

Logitech strays from the path

I haven't written much about Logitech here, but they've long been one of my favorite tech companies because they have a history of breaking all the rules of Silicon Valley:

--The Valley says you can't make money in commodity hardware, but Logitech makes good profits from the most commoditized bits of the computer industry.

--The Valley says you especially can't make money in low-end consumer hardware, but that's where Logitech thrives.

--The Valley says that if you want to make money in hardware, you need to be based in a low-cost part of the world like China. But Logitech is Swiss-owned and headquartered in Silicon Valley, two of the highest-cost places to do business in the world.

Logitech succeeded by picking well-established markets like keyboards and webcams where its skills in design, user experience, and added-value features let it charge a bit more than the commodity players. As the folks at Logitech will tell you, "we're chefs, not farmers." In other words, we don't create new markets, we come to existing markets and do an especially nice job of rearranging the ingredients.

But Logitech's financial performance hasn't been great for the last two years, and the company's most recent quarter was a loss. The disappointing earnings report stood out to me because Logitech put much of the blame on its Google TV product, which apparently had apocalyptic negative sales last quarter (more returns from retailers than shipments) (link). Apparently somebody at Google convinced Logitech to do some farming, and the company is paying dearly for it.

I'm usually an advocate of companies taking risks and pioneering new markets, and I think that's something Logitech has the skills to do if it's careful. But in this case, it chose a terrible target: the uncertainties of a new market, but with a user experience constrained by Google's software. So Logitech took on the risks of farming without the ability to fully apply its own strengths. Logitech was more or less a passenger on Google's boat.

The lesson, obviously: Be very careful when you step away from your proven strategy. Oh, and never trust Google to develop a new market for you.

Good luck naming your phones, Nokia (again)

Nokia announced that it has changed the naming system for its phones, going back from letters to numbers (link). The last time Nokia changed its naming, five years ago, I wrote a piece saying why technology naming schemes eventually break down after about six years. This morning I thought about updating the post, but actually I think it's still valid as-is, except that naming schemes now apparently last only five years. Here's a link to the article, so you can judge the rest of it for yourself (link).

Font games

Speaking of Nokia, there are few things more embarrassing for a company than announcing to the world that you have chosen a new font for your corporate communication. Making font and logo changes is often interpreted as rearranging deck chairs on the Titanic -- "we can't fix our fundamental problems but by God at least we'll fix the font!" That's unfair, of course; Apple changed its logo in the middle of its rebirth, ditching the six colors, and it turned out just fine. So I didn't blame Nokia when it announced on March 25 that it was moving to a new font (link).

But I'm surprised that more than four months later, Nokia's old font is still splattered all over its web pages. You can find the new one in some spots, but a lot of website navigation, headlines, and even new product announcements are in the old font. Here are some examples (click on the images for a larger view):

Nokia Conversations (official company blog), August 2, 2011. Note the use of the old font to announce the company's newest product. That means the use of the old font isn't limited to legacy bits of the website that haven't been converted yet.

Nokia Press website, August 2, 2011. New and old logos together on the same page. That's got to annoy the corporate branding folks.

Nokia UK home page, August 2, 2011. New font used for the headline, but the old font is used elsewhere.

Nokia US home page, August 2, 2011. Old font almost everywhere. Well, you kind of expect Nokia's US site to be behind the times.

Nokia Finland home page, August 2, 2011. The greatest use of the new font -- except when they mention Ovi. Freudian slip?

I feel childish and petty for picking on Nokia about a little detail like this. Fonts stand out to me because I used to run a font company, but I know most people don't even notice them. Nokia has much bigger problems to solve.

However, four months is more than enough time to switch over to a new font, especially in newly-created headlines. Since the criticisms about Nokia's smartphones often center on inattention to detail and slow execution, you'd think they would want to execute crisply wherever they can. In its March announcement, Nokia wrote that the new font is important because "the letters flow into each other somewhat, creating the impression of forward movement." Since the old font lingers, does that create the impression that Nokia's not moving forward?

How to Shape the Mobile Data Market

2011-06-23T00:04:00.000-07:00

(Part 3 of "Who Will Pay for Mobile Data?")

There's a big nasty dilemma hidden at the heart of mobile computing: No one knows how we'll pay for all that mobile data we're supposed to use in the next few years. The question doesn't get much publicity, but it drives some of the most intense debates in mobile, including net neutrality and the wireless bandwidth "crisis."

This is the conclusion of a three-part series on the issue. In Part 1 (link), I talked about the tech industry's unlimited vision for the growth of mobile data, and why I think it won't come true because we'll run out of people willing to pay for data service

In Part 2 (link), I discussed the alternate scenario, in which everyone is willing to pay for mobile data and adoption of it continues to accelerate. In this case, the mobile operators will need to invest urgently in increased capacity, and even with that investment we'll eventually run out of wireless bandwidth.

The two scenarios leave mobile operators trapped between the need to expand their networks and the fear that they won't be able to pay for the expansion. So the operators are trying to get other parties to help pay for the network. I believe that's the real driver behind the net neutrality debate and the rhetoric about a wireless bandwidth "crisis." Ultimately, government regulators will decide who will pay and how the mobile data network is structured, which will have a huge effect on which companies win and what we can do with the network.

In this part I'll give my take on what we should do about the situation, and I'll talk about the opportunities all of this change creates for operators, handset companies, and developers.

The look of mobile data in the future

If you only took away two messages from the first two posts in this series, these are the ones I'd want you to remember:

1. The only thing we can predict for sure about the future of mobile data is that it's unpredictable. Maybe I'm right that it'll saturate soon; maybe Cisco's right that it'll go on growing explosively for years; maybe we'll average out to something in the middle. The variables in play are so numerous, and so complicated, that absolutely no one can predict for sure what will happen.

In that sort of uncertain situation, I think our top priority should be to keep the mobile market as flexible as possible, so it can respond quickly and efficiently to whatever the customers decide to do. That means we should ensure that market signals -- things like pricing and customer demand -- are as clear and unambiguous as possible, so we'll all know what the real level of demand is, and we can all respond to the same base of information. The word "transparency" gets overused these days, but goodness gracious we need as much transparency as possible in mobile data.

2. We should plan wired and wireless data together. We need to deal with the reality of the mobile network and market, not what we might want it to be. And the reality is that we're not creating a separate wireless data network, we're creating a single integrated wired and wireless network. A lot of the political rhetoric about mobile data talks about a completely cellular data future as some sort of public goal. It's more like a public fantasy. Every forecast I've seen from the wireless operators requires that they be able to offload a lot of traffic to the wired network. Forget about wireless replacing wired; what we need to do is make sure they both work together well, with each focusing on what they do best. That means wired is used whenever possible because in most cases it's cheaper and higher capacity, while wireless fills in the gaps.

We should set up a level playing field between wired and wireless so the market can sort out which traffic should go where. Artificial political goals for the penetration of wireless, or favoring one network technology over another, are incredibly dangerous because they may lock in a market structure that turns out to be unaffordable. In fact, because the market is so unpredictable, those sorts of goals are almost certain to be wrong.

So I get queasy when the US Federal Communications Commission, and even big companies like Google, argue that wireless data should have different regulations than wired data. I think that increases the risk that we'll accidently bias the overall network in the wrong direction.

What we should do

As I've said before, I am not a big fan of government regulation in business, because it's usually inefficient and slow. However, there are some situations in which you can't get the government out of the market, and I think cellular wireless is one of those cases because the public ultimately owns the airwaves in most countries.

So if we're going to have government regulation, let's do it right.

The grand bargain. The operators are asking for some mammoth benefits. In the US, some of the biggest operators want to merge. Okay, let's let them do it. I don't think TMobile US is large enough to be viable in the long term anyway, so we need to merge it with either AT&T or Sprint. If TMobile joins AT&T, which is the current proposal, the next merger in the US will be Verizon-Sprint; I think we have to accept that as well, for the same reason.

The operators in the US and Europe want more spectrum allocated to them. Again, I'd go ahead with it. In the US, the television networks aren't using the extra spectrum, so it ought to go somewhere useful.

But in return, we should demand serious changes in the cellular data market. I'm not talking about tweaks at the edges, I mean permanent changes in the rules of the game, designed to ensure lasting competition and a more flexible market that responds better to customer needs.

Here's what I propose:

Stop whining about the wireless "crisis"

The first step is to change our rhetoric. The bandwidth "crisis" is the tech industry's equivalent of the War on Terror: it's based on a genuine problem, it can never be completely solved, and it can be used to justify many actions that people might not otherwise consider.

The idea of a wireless crisis is an incredibly convenient tool for motivating government regulators. Elected officials assume they are responsible for solving a wireless spectrum crisis, since they allocate wireless spectrum. If it were called a "Verizon and AT&T don't want to pay for a bunch more cell towers crisis," I don't think President Obama would propose spending $50 billion on it.

This isn't just a US issue. Anything one government does in mobile data is played back in other countries as a justification for equivalent actions there. On a recent trip to Australia, I was surprised to hear a radio commentator complaining at length about the government's plan to supply broadband service to many Australians through landlines rather than wireless. You can make a good argument for using landlines, since (as we discussed in part 2) they can carry a lot more data than wireless. But the commentator was upset that Australia was failing to do "what Barack Obama is doing in the United States."

It's reasonable to ask what's so wrong with a little crisis hype and international competition. After all, governments move far too slowly in most cases, so if a bit of alarming rhetoric makes them respond faster, isn't that a good thing? The trouble is that we'll all have to live with the results after the "crisis" is "solved." In that world, no matter how much spectrum we allocate to wireless data, service will continue to have slowdowns, outages and service gaps, especially in the United States, because it's more profitable for the operators to run their networks right at the edge of overload (in this sense they have the same financial incentives as airlines).

We're lying when we tell people that the whole wireless data network could collapse. Although service problems are a certainty, there is virtually zero risk of a full network collapse, unless the operators cause it themselves by underpricing data plans and selling more smartphones than they can support. And we're misleading people when we say that prices will go up unless we allocate more spectrum. Prices will eventually go up no matter how much spectrum we allocate to data, because demand for cellular data is growing faster than supply.

By overstating the risks and talking about the "crisis" as a temporary, fixable thing, we create an unrealistic public expectation for the quality and price of cellular data in the future. That may well be advantageous for a couple of quarters or even a year, but in the long run it will erode public trust when we don't deliver the benefits we promised. The wireless operators, especially AT&T in the US, already have big image problems. Overpromising will make the problems worse. To the extent that government agencies, and mobile tech companies like Apple and Google, participate in the crisis rhetoric, they risk their credibility as well.

We need to ask ourselves as an industry if we want to have the same sort of public image in five years as the airlines have today. If not, we should be honest with people now. For example, I think there is a convincing, legitimate case for reallocating old TV spectrum for data services. Without it, mobile data prices will go up faster, and a lot of the features many of us want from mobile data may not be affordable. But we should also be honest with people that cellular bandwidth overload is a chronic disease rather than a crisis, the network is not going to collapse unless we're incompetent, cellular service will not be as fast or cheap per bit as a wired, and cellular data will generally be a supplement to our wired broadband, not a replacement.

Make the cellular data market transparent

The problem with the cellular data market as it's structured today is that it often hides from users the real cost of the network they use, so they can't make well informed choices, and it's hard for us to tell which buying patterns are genuine and which ones have been created artificially. For example, the cost of your smart phone is subsidized, so you don't realize what an expensive piece of hardware you're carrying in your pocket. You're told that you have unlimited data, but actually if you use it too much your operator will probably reduce your data speed without telling you.

By making cellular data seem cheaper than it is, we encourage people to use the network more, increasing the very overload that we're supposed to be fixing. Some of the proposals for the future of mobile data would further increase the overuse of cellular data by making it seem even cheaper to users.

The structure of the mobile market also limits competition among mobile operators (especially in the US), and reduces competition between mobile phone manufacturers.

I think this systematic distortion of the market must stop. If people could see the real cost of cellular data, they would make better-informed decisions about when and how to use it, and we wouldn't need secret back-end controls on traffic. Meanwhile, more competition in services and phones would mean faster innovation, more consumer choice, and more efficient prices.

Here are some specific steps I think we should take:

1. Ban covert traffic limits. Today some wireless operators (and some wired ones as well) are quietly reducing the quality of service they deliver to some users, without telling them. This is done through various techniques including "traffic shaping" (prioritizing or delaying certain types of data packets) and "throttling" (reducing the throughput of the network, or the speed of certain transactions). In effect it usually means reducing the connection speed of people or apps that use the network the most. For example, Dean Bubley recently wrote about an ISP who consistently reduced data throughput at particular times of the day (link).

There are some types of traffic management that make sense. E-mail spam can be reduced through throttling that limits the number of e-mails that can be sent by a single account per second. Throttling can also be used to limit malware attacks, by reducing the ability of a rogue app to flood the network with traffic. And I think it's fine to enforce the speed you paid for in your Internet connection. For instance, if you've paid for a 10 MBPS connection and the operator limits your throughput to 10 MBPS, I do not have a problem with that.

But in some cases the operators are limiting network performance to covertly restrict users, either by interfering with certain types of traffic, or by limiting the speeds of some users without telling them. For example, the current Verizon Wireless terms of service give them the right to reduce the throughput in your "unlimited" data plan if you're in the top 5% of data users (link). They can do this without notifying you.

This sort of hidden restriction is damaging to the market because people may sign up for a wireless plan believing they will get more service than they actually will. They can't make a fully informed decision between wired and wireless service because they don't know how much wireless data they're really going to get. This may misallocate resources and make the wireless network even more overloaded than it would be otherwise.

The answer to this is simple: Require operators to notify a customer when they have throttled or shaped his or her service (other than enforcing the promised speed of the connection). I am not against throttling in general, but it should not be done without notification. A text message would be fine. The Internet speedometer, which I discuss below, will also help with this problem.

2. Require a data gas gauge and speedometer in smartphones. Can you imagine buying a car that didn't have a gas gauge and speedometer? That's essentially what we do today with smartphones. For most smartphone users today, there is no easy way to tell how much data throughput you're getting from the network, and how close you are to any limits on your data usage. Some operators bundle apps to do this, some have more arcane ways to check, and some send you a text if you get close to the limit. But I think it's fair to say that most people are in the dark about their usage until they get their monthly bill, and if they do go over a limit they will have trouble figuring out why.

This is an easy problem to fix. We should require that every smartphone have an app, accessible at the same level as the Settings app, that tells the user how close he or she is to hitting any data caps in the service plan (for example, if you are a Verizon user, how close are you to getting throttled?). The app should also show how much data you're using at any particular time, so you can see how much throughput the network is really giving you.

We also should modify the signal strength bars to change color depending on how much data you're consuming at any moment. This would show you when you're using a website or app that uses huge chunks of data. When customers see that video or Flash makes their signal bars turn red, they'll be much more cautious about using those sites on the wireless network.

3. Decouple the phone purchase from the network. Currently in the US and much of Europe, if you sign a contract for a data plan, you get a discount of several hundred dollars on a new phone purchased at the same time. But you have to buy the phone through the mobile operator, giving them huge control over the selection and features of the phones they sell. Basically, users are not free to pick the phones they want; they have to take the phones their operator chooses to sell.

This operator lock-in is subject to all sorts of backroom manipulation. Weak phone vendors are forced to comply with a huge list of tests and requirements, while for stronger vendors the rules are often waived. I've also been told privately by some operators that they deliberately discriminate against some handset vendors because they just don't like them.

The handset vendors aren't completely clean either. A vendor with a hot handset may restrict its availability to a single operator in order to extract concessions from them. Can you say iPhone?

It's a wonder that some operator or handset company hasn't been sued already for restraint of trade. With the amount of operator shelf space shrinking in the US due to mergers, I think it's only a matter of time before there's a legal detonation.

In addition to the legal risk, these restrictions have the effect of restricting customer choice and competition, so they are bad for transparency. It's time to open up the handset market. To make that happen, subsidies should be separated from the purchase of a particular phone. When someone signs up for a plan, they should get a voucher for a discount on any phone. The voucher can be used at that time to buy a phone in the operator's store, or it can be used later to buy a phone in any other store.

This would encourage more selection and competition in mobile phones. It would create more direct competition between operator service plans. And it would put the wireless and wired networks on an even footing (can you imagine a wired data provider limiting the brands of PC that you can use with your cable data connection?).

In the US, I think we should consider one other step to open up the handset market. In most of Europe, and many other parts of the world, there is a vigorous retail market in mobile phones sold separately from an operator. Because everyone is on the same network standard, and because all the phones use SIM cards, it is easy to buy a new phone at retail and pop your card into it. You do lose the subsidy, but virtually all customers know they can at least switch phones if they really want to. This leads to a much larger selection of phones, and to higher competition between operators because it's easier to choose separately the phone and service plan you want.

The US market is much less open. Most mobile phones are sold only through operator stores, and it can be very hard to switch from one operator to another because they have different network technologies, and some of them don't even use SIM cards. Because it's so hard to switch phones, I think most US mobile users are barely even aware of what a SIM card is, and how to find it in their phone (most of them would probably confuse it with the SD card).

To open up the handset market, the US should require that all mobile phones use SIM cards, and that they be switchable between the major operator networks. That way someone could go into a consumer electronics store, buy the phone they want, and use it with any network. This will have to be phased in over time, but we're already moving toward it anyway. Verizon and AT&T are both moving to LTE, and there are very strong rumors that Sprint will do so as well. So some day we'll have one standard cellular technology base in the US. In the meantime, we'll have to buy dual-mode phones that use both LTE and either GSM or CDMA, depending on which operator you use. But the chipsets for smartphones are increasingly capable of handling several different networks, so they can switch between LTE, GSM and CDMA. I think it would be reasonable to require that future smartphones sold in the US be SIM-based and capable of operating on all three standards. I think the real question is how quickly we could phase in that requirement; if you have thoughts on that please post a comment.

4. Enable toll-free apps and websites. As I discussed in Part 1, we need the data equivalent of a toll-free phone call, in which a website or mobile app company would pay for the data traffic generated by a particular app or site. This requires changes to the operators' billing infrastructure, but I think it will be essential for enabling the growth of mobile data. It should be an extremely high priority for the operators, and it's in the interest of web and app companies to get together with the operators to define standards for these charges, so they'll be easy for developers to work with. I suspect there's an important role government regulators can play in helping to encourage these negotiations.

5. Do not allow the operators, or the web companies, to discriminate against one-another. I agonized over this one a lot. The operators would like to be able to charge web companies extra if they want reliable delivery of data (for example, in a time-sensitive app like video streaming), or if they want a guarantee of a certain level of throughput. I understand why they want to do this, because it would help pay for their infrastructure, and I do not think it is inherently evil. But I think it would cause too much collateral damage to the mobile market. In fact, I think it would put us on a road toward wrecking mobile data.

The first problem is that hidden back-end charges like this are essentially an invisible subsidy for cellular data. A user won't know the real cost of the data he or she is using, and this could end up increasing traffic on the cellular network artificially, contributing to data overload.

There are also big practical problems with implementing charges for quality of service. As Dean Bubley has pointed out repeatedly (link), there are huge drawbacks to this sort of approach. To give one example, there is no way to guarantee quality of service when you don't know how overloaded a particular cell site will be. If one high-priority video session comes in, does the operator shut down five other "regular" data sessions to make way for the high-priority one? In that case, the "regular" customers are not getting the service they paid for, and they won't even know it. They'll just think something is wrong with the web app they're using.

I agree with Dean that there's no way to make a system like this work predictably and fairly. Better to just charge users for the data they consume, let them know how much that costs, and allow them to adjust their own usage patterns.

The other reason we should ban quality of service fees is because in some cases they could produce in a destructive power struggle between operators and websites, with users caught in the middle. US cable television is a nightmare example of what not to do.

In cable television, it's common for network operators and content companies (the cable channels) to pay each other for services. For example, Home Shopping Network reportedly pays cable TV companies to be included in your service package, because they know they'll make more money if they're seen in more homes. They are, effectively, subsidizing your cable television service.

On the other hand, many of the most popular channels charge the cable companies a fee for the privilege of carrying them. For example, ESPN (the leading US sports network) reportedly charges cable companies about $4 per month per household; other popular channels are in the 5-20 cent per month range.

The same sorts of things could happen in the mobile web if the operators could charge websites for service. For instance, what if Facebook started offering video streaming as part of its services? If the mobile operators tried to charge Facebook for its network usage, what is to stop Facebook from turning around and demanding a fee from the operators for allowing them to carry Facebook?

Unless we're very careful, we could end up with a situation in mobile similar to the one in cable TV, where users get caught in disputes between the network operators and the content creators. Some of those arguments in the US have been incredibly ugly, with users tied into long-term contracts for cable service but unable to access the channels they thought they paid for. And remember, in cable we get these messes even though we have only have about a hundred channels to negotiate. On the web, you have literally millions of them.

The operators should not kid themselves that they would win in this sort of showdown. If Facebook cut off its traffic to Sprint's servers, what would happen? Would users abandon Facebook because it's not on the Sprint network -- or would they switch off of Sprint because it doesn't have Facebook? I think we all know the answer to that: there would be crowds holding pitchforks and torches outside the Sprint stores. The websites have far stronger brands and far more user loyalty than the operators. So it's unlikely that the operators will really be able to coerce money out of the most successful websites.

In practice, I think the operators would be able to get fees only from small startups that don't have brand awareness with users. That becomes a barrier to entry for those companies, which historically have been the source of most online innovation. To give a real-world example of what that could do to the web, look again at cable television programming: A small number of networks dominate the selection of channels, resulting in slow innovation and reduced choice. There is very low turnover in these channels.

If the web worked like cable TV does, we'd all still be using AOL for e-mail.

I've talked with people at small startup cable channels, and they are incredibly bitter about the barriers they face getting placement on cable systems. They're actually counting on the web to let them bypass the cable operators.

I think the only way to make the mobile market work efficiently is to make the payment mechanisms as clear and visible as possible. Make users pay for the data they use, and allow web and app companies to make their sites and apps toll-free if they want to, but don't start creating hidden layers of fees and subsidies. That will just distort the market and expose operators to retaliation. My operator friends, this is a war you cannot win -- so don't start the battle.

To formalize this settlement, government regulators should ban both operators discriminating against websites or types of traffic, and websites withholding their content from a particular operator or network.

6. Encourage open WiFi. As I mentioned above, we're not creating a standalone cellular network, we're creating an integrated wired and wireless network. WiFi has a critical role to play in that network, and we should make it even more central. Here's a question for you: How often have you tried to find an available WiFi network, and seen no networks at all in range? I can't speak for other countries, but it almost never happens to me in any populated part of the US. But how many times have you tried to sign onto WiFi and found only locked access points? That happens to me all the time.

We already have a very dense, well-populated wireless front end to the data network in most places that matter, but we can't use it fully because most of the access points are locked down.

There are good reasons for the lockdown. If you leave your WiFi router open, it can be hacked (actually, it can also be hacked if you keep it locked, but that's a topic for a different post). Also, in the US if someone downloads child pornography or does something else illegal on the Internet, the law often goes after the router owner because that's the only person they can find. You can read some horror stories here.

But getting those connections opened up would have huge benefits for the public, because it would take some of the pressure off cellular wireless. Rather than telling people to close off their connections, we should be encouraging them to leave them open. Regulators could help this in a couple of ways:

--First, we should require that the next generation of WiFi routers have a pass-through feature enabling public access to the Internet without giving access to the user's home network. Traffic from the user's private connection should have priority over the public one, and if public usage is excessive the user should be able to throttle it.

--Second, the law should be changed to protect people whose open wireless connections are abused without their permission.

Opportunities

So that's how I think the future of mobile data will look: unpredictable growth, always skating the line between overloaded and overpriced, and with a huge variety of users, almost all of them with some sort of limits on their data service, and many with budget plans that encourage very careful use of data. For the health of everyone involved in the market, I hope we'll also get regulations that make the market more transparent, and more open to new players.

It's a different mobile data world than many analysts have been predicting, but that's not necessarily a bad thing. Often the best business opportunities happen when conditions change unpredictably. I think this is one of those times. So I'd like to conclude by recapping the big opportunities as I see them...

For handset vendors, I think the most interesting new opportunity will be the smartphone designed for people with limited data budgets. How do you entice people into gradually using more data? This is an opportunity to do a fundamental rethinking of the smartphone user experience. Since different people will probably respond to different data features, I think it will also be an opportunity for smartphone vendors to stake out their own market segments, helping to insulate them from the intense commodity price pressure we're likely to see in generic smartphones as the market fills up.

Try to think like an automobile vendor in 1950. Do you want to compete with everyone else in midsize sedans, or would you like to dominate a smaller segment like station wagons or sports cars?

To target a segment, you'll need to hire people who know how to design integrated hardware-software systems rather than just devices, and you'll need to learn to partner closely with app and web companies as peers (rather than the serf-overlord relationships you're used to having).

In the last couple of days I've been contacted privately by some people who predict even more revolutionary moves by the handset companies, most notably the idea of selling a phone at retail bundled with airtime that you've bought from an operator. In other words, the phone comes with its own network service. That's what Amazon did with Kindle, and there's nothing in principle to prevent a handset company from doing the same thing.

I think there would be a lot of implementation challenges, most notably keeping access to that third party network if it starts to run out of capacity. But it would be intriguing to see what someone like Apple would do with this.

For operators, I think it's important to pick your battles. Although covert traffic-shaping and charging websites for service is very seductive, in the long term that will lead you into intense conflicts that you're not likely to win. It would also create more incentives for the handset companies to set up their own virtual networks, which really would transform your networks into dumb pipes.

I think it's better to focus on new business models that are a win for both you and your business partners. The most appealing of these to me is toll-free data. That would be intriguing to a lot of web and mobile app companies, allowing you to build cooperative alliances with them. And it's a whole new revenue stream that might become very large over time.

For web and app developers, the emerging segmentation of mobile data makes the idea of "enticement" even more important than it is today. How do you give people some software for free and then entice them into paying for add-ons or other apps? Already most of the mobile app developers I talk to are thinking along those lines, and obviously that business model is very well established on the web. But as smartphones reach down to more price-sensitive people who are less enthusiastic about data, there will be intense demand for apps and websites that can entice them into starting to pay for bits of mobile data.

These "data on-ramp" apps are not always intuitively obvious, and will probably differ by country (for example, mobile horoscopes were a major driver of beginning data use in parts of Asia). The companies that can find the on-ramps will be incredibly valuable to investors, handset companies, and operators.

What do you think?

That's my take on the situation. What do you agree and disagree with? What else would you add to the picture? How does it differ in your country? And most importantly, what do you think the opportunities are? Please post a comment and share your ideas.

The Truth about the Wireless Bandwidth "Crisis"

2011-06-21T22:09:00.000-07:00

(Part 2 of "Who Will Pay for Mobile Data?")

There's a big nasty dilemma hidden at the heart of mobile computing: No one knows how we'll pay for all that mobile data we're supposed to use in the next few years. The question doesn't get much publicity, but it drives some of the most intense debates in mobile, including net neutrality and the wireless bandwidth "crisis."

This is the second of a three-part series on the issue. In Part 1 (link), I talked about the tech industry's unlimited vision for the growth of mobile data, and why I think it won't come true because we'll run out of people willing to pay at the current rates for data service

In this part, I will talk about the alternate scenario, in which most people are willing to pay for mobile data and adoption of it continues to accelerate. In this case, the mobile operators will need to invest urgently in increased capacity, and even with that investment I think we'll eventually run out of cellular bandwidth.

This means the operators face two conflicting possible futures. In one, growth is about to slow down and they don't need to invest in a bigger network. In the other, they need to invest urgently in additional network capacity. For telecom execs, it's a bet-your-career choice with no clear winner. So, naturally, they are trying to get someone else to pay for the investment. That's the real cause of the rhetoric about a wireless "crisis," and it's driving much of the net neutrality debate.

To understand why this is happening, let's start with a look at the physics and economics of a cellular data network...

Mobile data doesn't scale like fixed-line broadband

When mobile operators in the US and Europe first built out their 3G networks, they miscalculated what people would do with them. They expected that new, relatively low-bandwidth mobile services like a simplified version of the Internet (called WAP) and picture messaging (MMS) would be the dominant source of data traffic on the network, and they structured it accordingly. But those new data services failed to take off, and the operators were left with a ton of excess capacity. Desperate to generate any revenue from their new networks, they offered fire-sale data plans for the newly-emerging smartphones. It didn't matter if the operator made a good profit off a smartphone data plan -- with the network already built and sitting idle, any data revenue was better than none at all.

So the operators in many regions gave us low-cost or unlimited data plans. Those plans set customer expectations for how they should use mobile data and what it would cost in the future.

Overcapacity continued on most mobile networks until the launch of the iPhone in 2007. We tend to forget about it today, but the iPhone was the first smartphone to make PC-style browsing practical and attractive for most smartphone users. The result was an explosion of mobile browsing, and almost overnight mobile data networks supporting the iPhone started to go from overcapacity to overload.

The reason for the overload was simple -- people in the developed world learned to browse first on their PCs, most of which have high-speed wired connections to the Internet. Bandwidth on these connections isn't infinite, but it's large enough that activities like file sharing and watching videos are mainstream.

When people started doing PC-style browsing with their smartphones, they brought their PC browsing habits with them. Unfortunately, the cellular wireless networks don't have nearly the same data capacity as the wired networks. So mainstream browsing behavior on a PC turns out to be excessive browsing on a smartphone, especially if you use a lot of YouTube.

Even if you're not a big video user, the normal sorts of messaging and web traffic created by a PC can overload a wireless network. A typical PC has a more or less continuous connection to the web, so instant messages and web app updates can ping back and forth constantly. But to conserve battery life and stretch network resources, a smartphone doesn't talk to a cellular network continuously; it basically says hello to the network, sends a message or a bit of data, and then says goodbye. Each little message and each app ping creates its own set of hellos and goodbyes. Send too many and they can overwhelm an operator's servers. Web apps send too many.

The operators, of course, can add additional wireless capacity to cope with the increased traffic, and they have been doing so. Cisco estimates that the total capacity of the world's wireless networks will increase by about 10x from 2010 to 2015. But these additions eventually run into physics problems. There's only so much information you can squeeze into a certain amount of wireless spectrum. At some point the cellular infrastructure overloads, and as an operator you have some ugly choices:

--You can add a lot more cell towers, reducing the size of each radio cell and therefore increasing the number of devices you can support. Unfortunately, this is extremely expensive -- not just to build the towers themselves, but for the fiber optic cables connecting them, the servers to manage them, and for the lobbying you must do to overcome political opposition to additional towers.

--You can offload data traffic to local wired connections. The operators are already pushing this hard, via WiFi. Some are also encouraging the installation of femtocells in individual homes and businesses. (A femtocell is basically a micro cell tower in a box the size of a wifi router. It gives you cellular service inside a building or business, using wired broadband to communicate back to the cellular network.) But that too is expensive: at around $200 a pop (link), it would cost about $13 billion to attach a femtocell to every one of the 67 million consumer broadband lines in the US. Plus there's the support cost for installing them, and the expense to put millions more cells in businesses, and the cost to buy the back-end servers necessary to support them. Nevertheless, some very smart people watching the mobile data market believe that femtocells are essential to the future of mobile data (link). Cisco estimates that offloading of some sort will handle about 20% of mobile traffic by 2015, and up to 40% in some countries.

--You can buy more spectrum, but there are huge licensing costs associated with that, not to mention the cost of retrofitting your cell towers for the new frequencies and replacing all of the phones in the installed base.

Unfortunately, even if you make all of the changes above, there are some very convincing arguments that it won't be enough, quickly enough, to head off a capacity crunch if current trends continue. The growth rate of smartphones, tablets, and wireless notebooks will swamp the cellular infrastructure no matter what. Folks in the mobile industry have taken to calling this the "Moore's Law vs. Shannon's Law" problem, with Moore's Law representing the exponential growth of computing power, and Shannon's Law the fundamental limits on how much data you can push over a particular chunk of spectrum. Reinforcing the Shannon bandwidth limits is the fact that some other critical elements in the mobile data infrastructure can't keep up with Moore's Law. The number of cell sites can't increase exponentially, and handset battery capacity is barely growing at all. A crunch is inevitable at some point.

So the people who tell you that cellular wireless will replace wired broadband just don't understand the physics involved. An outstanding summary of the situation was written by Martyn Roetter, a telecom consultant (link).

Here's the key paragraph:

"Until and unless the current laws of physics are invalidated in ways that remove current limits on spectrum capacity such as are embodied in Shannon’s Law, the future will see: (a) The vast majority of broadband traffic (as distinct from numbers of broadband subscriptions) continuing to be carried (delivered and transmitted) over fixed access networks; and (b) Demands for broadband traffic from wireless or mobile subscribers outstrip the capacity of all the bandwidth available for radio access networks to handle it, even with the use of the new spectrum that can be allocated and the deployment of more spectrally efficient technologies... Bandwidth within one optical fiber is vastly greater than all the bandwidth that might theoretically be made available for mobile communications, even if every megahertz were to be refarmed for mobile services. A single mode fiber has a bandwidth of as much as 100,000 GHz, or 100 terahertz, whereas total valuable spectrum for mobile communications provides bandwidth of no more than at most 3 GHz."

Got it? What he's saying is that wired broadband traffic can continue to grow exponentially, which will create demand for mobilizing that traffic through cellular wireless -- which the cellular networks can't handle.

If data traffic continues to grow at its current pace, we're headed for a situation in which the cellular networks will be overloaded no matter what we do.

Rock, meet hard place

So we have two possible scenarios for the future of mobile data. In the segmented scenario I discussed in part 1, we run out of customers willing to pay for mobile data plans, and the growth of mobile data slows down. In the consensus scenario, customer demand continues to increase, and we run out of cellular network capacity.

These conflicting scenarios are terrifying to the mobile operators because there's no way to tell for sure which one will happen. If you knew for sure that demand was going to continue to grow, you'd invest heavily in capacity, and also start raising data prices to restrain the growth in demand to something you can actually deliver. But if demand is about to stop growing, investing in capacity and raising prices is exactly the wrong thing to do. You'll end up with excess capacity, and the price hikes will make demand stop growing even faster.

This table summarizes the dilemma (click on it to see a larger version):

An economist would tell you that this will all sort itself out in the long term, and I'm sure it will in 20 years or so. But in the meantime, in the real world, the operators have to invest in infrastructure years before the demand arrives. If you're an executive at a major operator, it is almost impossible to get the forecast right. That means you will probably either overbuild the network, wasting billions of dollars and putting your career at risk; or you will underbuild, losing share to competitors and putting your career at risk.

You can't win. It's like one of those Star Trek episodes where Captain Kirk destroys the rogue computer by putting it in a logical loop (link). If you watch closely at tech conferences, you can see the smoke seeping out of the ears of telecom execs.

Faced with this dilemma, those telecom execs naturally are trying to find a third option: Get someone else to pay for mobile data. There are a couple of options:

Option 1: Have the government pay for mobile data

I doubt that most governments would pay to make wireless data completely free for everyone, but I was surprised when I found out how much governments are already paying for mobile. For example, the US government subsidizes mobile phone service for millions of unemployed people (because it helps with their job searches; they need phone numbers so employers can all to offer them jobs). I could easily imagine that benefit being extended to include mobile data, on the assumption that poor people need access to job boards (how we'll avoid paying for their YouTube and Kongregate usage I don't know).

Governments are also being lobbied to give special regulatory treatment to wireless data. The rhetoric around a "wireless spectrum crisis" is being used to influence governments. The focus of this lobbying in the US is on taking spectrum away from the TV networks and supplying it to the mobile operators. Effectively that is a financial subsidy for the operators -- if the government forces the transfer the operators will have to pay less, and will get the spectrum faster, than if they were to purchase it on the open market.

Here's how the lobbying works. This is an excerpt from an e-mail sent to me recently by a PR firm working for a group called the Internet Innovation Alliance:

"IIA's Blog: The Spectrum Clock is Ticking
Writing for Forbes, Lawrence J. Spiwak, President of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, warns Congress that more spectrum needs to be freed up for mobile broadband and it needs to be freed up soon: Like it or not, the clock is ticking on spectrum exhaustion, both for consumers and our public safety professionals. Unless we want a market characterized by higher prices, failed data sessions, dropped calls and stifled innovation, policymakers need to implement a cohesive spectrum policy with a large degree of urgency."

At first glance, that reads like a standard plea from a bunch of web companies worried about the mobile network getting overloaded. But the backstory is that both IIA and the Phoenix Center are reportedly funded by the mobile operators (link, link). So this isn't an independent assessment of the situation, it's the operators sending us a message. And the message is: "Give us more bandwidth or we'll trash your phone service." I think that's a bit disingenuous -- unless the operators seriously mismanage their networks, we won't end up with both bad service and higher prices. But they're right that without more spectrum we'll definitely get one or the other.

Option 2: Make web companies pay for mobile data

Several of the leading operators in Europe recently argued that big tech companies like Apple and Google should be forced to pay to use the wireless networks. Although they don't put it this way, they're asking the big Internet companies to subsidize mobile data plans for users (link).

The CEO of Telefonica said the web companies "use Telefonica’s networks for free, which is good news for them and a tragedy for us. That can’t continue."

Here's the CEO of France Telecom (link):

"The real risk of everything is collapse. Nobody utters this loudly enough, but the real issue for the world is a collapse of the network or some local collapses. We are the people with pipes. We are supposed to invest heavily in pipes in order to bring the capacity which is necessary to sustain the explosion of consumption and usage and data traffic in our networks. At the same time, the people that create this traffic…are not really incentivized to manage properly, globally, the traffic. There is an unbalance in the overall system, which in our view is a major problem. It is totally impossible to absorb such an explosion in traffic without first, clearly investing massively in spectrum and equipment, and second, without introducing some new pricing approaches."

This is the heart of the whole debate about net neutrality. I believe it's not really about mobile operators trying to give an advantage to their own services, it's mostly about the operators trying to open up a second revenue stream because they're afraid they can't get enough revenue from users to support future growth.

For the operators, charging web companies a fee seems intensely attractive because the fee could be scaled to the amount of traffic they generate (unlike the flat-rate data plans that users prefer), forcing the web companies to use bandwidth more efficiently. It also would let operators increase their revenue without directly reducing user demand. Basically, the web companies would subsidize a shift from wired to wireless computing.

The third option

I can see why the operators are pushing on both of these options. They're in a difficult situation, and it would be very helpful to them if somebody bailed them out (link). I might be trying the same things if I worked for an operator. But there is a third option for managing cellular data overload, and it deserves to get a lot more attention:

Raise prices.

In almost every other industry in the world, you're responsible for charging enough money to support your business. Yes, sometimes you have to make investments before you know how much demand there will be, and yes, sometimes that creates a lot of risk for your company. But that's why they pay you the big bucks, Mr. or Ms. CEO.

I don't understand how we as a society came to the conclusion that wireless data should be different. Is there some religious commandment that people must be allowed to stream Netflix on the subway? Or maybe those big Cisco growth forecasts have led us to think that endless growth of mobile data is a ravenous beast that will cause immense suffering if it's not fed more bandwidth.

Baloney. If the network is overloaded, raise your prices until you either get enough money to expand the network, or you force people to use less data. If you want network bandwidth used more efficiently, show users the cost of the data they use and they'll demand more efficient apps and devices on their own.

I bet a price increase from $50 a month to $80 a month for mobile data would end the bandwidth crisis overnight.

Not only is higher pricing the simplest way to manage network overload, it's going to happen no matter what we do. Even if we give the operators all the bandwidth from the TV networks, and get the web companies to subsidize wireless service, all that will do is delay the crunch for a few years. More traffic will switch from fixed-line to wireless until once again the network saturates and prices go up. It is inevitable.

What it means

When we plan for the future of mobile, we need to be realistic, and a little bit humble, about what we can change and what we can't. We need to learn to live with the things we can't change, and focus on doing a good job of managing the things we can.

Here's my list of the things I think we can't change about mobile data because they are driven by economics and physics:

--Most data traffic will be wireless only for the last 100 feet (30 meters) that it travels from your device to the nearest hotspot (whether it's WiFi, femtocell, or something else). So we need to be careful about our terminology. Most data could well be technically "wireless" in the sense that it passes through WiFi at the end, but that is a meaningless distinction for the purposes of this article; most of it won't pass through the cellular data network.
--Most of us will continue to have some sort of broadband cable connecting to our homes and offices, or to a point very close by (like the lamp post in the street outside your window). Forget those visions of cellular replacing the wired broadband network; in the developed world it can't happen.
--The cost per-byte of cellular data will be significantly higher than the cost per-byte of wired data. The difference will be large enough that we'll be aware of it and it will alter the way we use our devices.
--Flat rate unlimited cellular data contracts will go up in cost, or will be replaced by much more variable pricing for most users. This is already underway at some operators. For example, Verizon is rumored to be about to move from $30 per month for unlimited data to a tiered plan that ranges from $30 per month for two gigabytes to $80/month for 10 gigs (link). I don't usually like consumer price hikes, but in this case the change is long overdue.
--As the relative cost of mobile data rises, most of us will use cellular data primarily as a supplement to the wired network when we're on the go. We'll become religious about turning on WiFi in our smartphones and tablets, and making sure it can connect at home and at work. Because cellular data is more expensive, many of us will try to avoid using very data-heavy apps on the cellular network.

This means cellular data use won't be carefree. That may not sound like a big difference, but in consumer terms I think it is. We've been making the assumption that cellular data can directly replace fixed-line data, just as cellular phones replaced fixed line phones for many people. "Go ahead! Use it anywhere! Be free!" But for an aggressive user of mobile data, that can't happen. Our use of cellular data is going to be much more nuanced, managed, and carefully thought out than our use of cellular voice. I think many of us will look at our cellular data budgets the same way we look at our automobile budgets. Some people will spend more, some less, but I think most of us will be aware of the cost and manage it actively.

The wired Internet will continue to set the tune. The ongoing role of fixed-line broadband means that many leading-edge web apps will continue to be designed around the capacity and responsiveness of fixed-line networks. This is another subtle but very important difference, because it means the mobile operators will continue to play catch-up to customer expectations set on the wired networks. There will be exceptions; some features of cellular data (such as location) will drive unique mobile apps. But in most application categories, rather than shaping the future of the Internet, mobile operators in the developed world will be pushed to deliver an Internet experience that evolved on fixed-line networks.

Here are the things I think we can change about cellular data:

--We can alter the share of total data traffic that moves through the cellular networks. By transferring spectrum and giving the operators other favorable treatment, we can make the overall capacity of the cellular data networks higher than it would have been otherwise. Basically, we can make the mobile operators bigger. That may delay the onset of mobile network congestion, and enable some classes of web applications to be more successful in cellular (for example, low-res video streaming). That can have a big impact on individual users and app companies. It will also have a big impact on the ultimate revenue and profitability of the mobile operators, which is why they are lobbying so hard.
--We can probably change the size of the average mobile data bill, but only temporarily. The more revenue streams we give to the operators, the more mobile data we'll probably get for a given user price. However, as I mentioned above, keep in mind that if mobile data is made cheaper, people will use more of it, which will eventually saturate the network and cause prices to rise. So any money we save on our mobile data bills will probably be temporary.
--The decisions we make in the next few years will profoundly change the economic structure of the wireless data industry. Changes in regulations and pricing rules will have a huge impact on the ability of small companies to compete with large ones in mobile, and will determine who pays for the whole thing. This could decide whether the mobile internet looks more like the wired Internet (low barriers to entry, lots of companies) or cable television (high barriers to entry, dominated by a few big players).

I think the most important thing about the three points above is that they're all driven by government regulation. The rules we set for the mobile Internet are going to determine the ultimate size of the mobile operators, how they are funded, how competition works in mobile data, and how much power is held by the various players.

That scares me. I prefer to have winners and losers in a market chosen by customer decisions, not government ones. You can't blame the mobile operators, or the big web companies like Google, for lobbying the government on these issues. But I don't think their interests are necessarily the same as the rest of the industry, let alone consumers. Also, most of the big players are driven by quarterly revenue, and in some cases they are pushing for changes that I think will help them in the short term but would actually hurt them in the long run.

I wish there were some scenario in which we could tell governments just to butt out and let the market decide, but governments are already deeply involved in allocating spectrum, and there's no practical way to undo that. So I think it's important that we all have a very thorough, open discussion of the government decisions to be made and the sort of wireless industry they'll produce.

That's what I'll cover tomorrow.

_____

In part 3, which I'll post tomorrow (link), I'll give my ideas on how we should structure the mobile data market. I'll also talk about the opportunities this new world of mobile data will create for companies in mobile. In the meantime, I welcome your comments and questions. This is a big, complex issue, and I don't pretend to have it all figured out.

Who Will Pay for Mobile Data?

2011-06-20T23:57:00.000-07:00

(Part 1: The End is Nearer Than You Think)

The most important question in mobile computing is who's going to pay for all that mobile data we're supposed to use in the next few years. The question doesn't get much discussion online, but it's at the heart of the most intense debates in mobile, including net neutrality and the wireless bandwidth "crisis."

How many users will pay for their own mobile data service? Will web companies also pay? Will the government step in? And most important, how much money are any of them willing to pay? The answers will shape the future of every company involved in mobile, and will have a profound effect on everyone who uses a mobile phone.

Here's a quick summary of my answers:
     --Because of economics and user psychology, I think we're headed for a slowdown in the growth of mobile data. The unlimited, exponential growth forecasts are wrong. I believe the ultimate mobile data market will be smaller, and much more segmented, than most people expect.
     --Even if I'm wrong about user demand, we're still headed for a slowdown in growth because the cellular networks can't grow fast enough to handle all the traffic being forecasted. This is due to physics and can't be changed; you could just as easily change the phases of the moon.
     --Many of the proposals to "fix" the problem would probably make it far, far worse. We could end up with a cellular data network that resembles American cable TV: slow to innovate, dominated by a few players, and subject to intense politics, with users caught in the middle.
     --In the future, cellular data for the majority of users will likely be metered, and the majority of people will need to be enticed into using it. That creates some excellent unaddressed opportunities for everyone from handset companies to app developers.

This is a very complicated issue, so I'm going to cover it in three posts this week:

Today's post talks about the forecasted growth of wireless data, and why I think growth won't continue the way most people are expecting. That creates some big challenges for mobile data companies, but also some fantastic opportunities.

Tomorrow I'll talk about the alternate scenario, in which mobile data growth continues at the same rate, eventually colliding with natural limits on the amount of data that can travel over a cellular network. I'll discuss how that collision drives the rhetoric about a bandwidth "crisis" and the debate about net neutrality.

In the third part, I'll discuss what it all means for the industry, and give my take on what we should do about it.

To start today's post, let's look at the predicted growth of mobile data...

The forecasts for mobile data growth are so sunny they could burn your skin

Every mobile phone will be a smartphone. Smartphones are already used by about a third of the US mobile population (link, link), and ownership rates are similar in parts of Europe (link). Horace Dediu says half of US phone users will be on smartphones by the end of 2011 (link), and non-smarthones will be virtually extinct a year later (link).

Mobile data traffic will explode. Cisco says global mobile data traffic will increase 26X from 2010 to 2015 (link). The growth will be driven by increased use of smartphones, and also a rise in the number of notebook PCs connected to the cellular networks. Notebook computers generate an order of magnitude more data traffic than smartphones, so even a small number of cellular notebooks drives a huge increase in traffic.

Mobile app shipments are off the chart. Apple says iOS users download 62 apps per device on average, for a total download rate of 206 apps every second (link).

The big tech companies are focused on mobile. Many of the hottest tech companies, most recently Facebook, say their biggest focus for this year and beyond is nailing the mobile opportunity (link).

PCs will be replaced by smartphones. A Google vice president says smartphones will render PCs irrelevant by 2013 (link).

The growing consensus is that our current cabled, PC-centric computing world will soon be replaced by an untethered world in which everyone uses smartphones and tablets to do their computing on the go. The mobile network we all envision will be just as flexible and carefree to use as today's wired Internet, but with the added benefit that you can use it anywhere, anytime, with a wide variety of different devices.

It sounds cool, but unfortunately no one has ever asked users if we're all willing to pay for that mobile data service. I think most of us aren't.

We won't pay for all the mobile data we want

We'll all carry smartphones, but... The forecast for mobile data growth is based in part on the assumption that in the near future most or all mobile phones will be smartphones. You can make a good case for that assumption. The price of smartphone components is continually decreasing, so at some point the parts cost a smartphone will be the same as a feature phone is today. Even if prices aren't completely equal, once they get close, it's more cost efficient for a mobile phone company to base its phones on a smartphone OS because it requires less rewriting of apps and support software for each new phone. The handset companies have an incentive to switch to smartphone hardware.

So I have no doubt that in the next couple of years most phones sold in the developed world will technically be smartphones. However, I think it's not reasonable to assume that they'll all be used as smartphones, because many users won't be willing to pay the data charges.

As I've written before (link), when I was at Palm we did a lot of research on mobile phone users in the US and Europe, and we found that about a third of them were willing to pay extra for new mobile data features in addition to voice and texting. Some of them were more interested in entertainment, some in business communication, and some in information management. These are the people who have been buying iPhones and BlackBerries.

The other two thirds of phone users were not willing to pay extra for any new sort of mobile data. Some of them didn't have enough income, some of them just weren't interested, but they all flat-out refused to consider spending extra. The Palm surveys were conducted several years ago, but since then I have seen no evidence to suggest the basic situation has changed. On the contrary, the most recent research I've seen was done by Forrester in 2009, and it suggested the unwilling-to-pay share of the population may have dropped from 66% to about 60%. So there is movement toward more willingness to pay, but it's very gradual.

It's hard for me to believe that most of those 60% will be willing to add about $400 a year to their mobile phone bills just for the privilege of checking their e-mail on the bus or streaming songs from Pandora onto their phones. And remember, that research data is based on people in some of the richest countries in the world. It may map fairly well to other rich countries like Japan and South Korea. But in the developing world, average personal incomes can't possibly support big mobile data bills. Most people there will need to sip data through a straw rather than gulping it from a mug.

So I have a fundamental disagreement with many industry analysts about how the mobile data market will develop. A graphic would help explain...

This has a huge impact on what will happen next. The consensus view says that with only a third of the population in the US and Europe owning smartphones today, the prospects for growth are fantastic -- we can still sell to the other two thirds! And after that we'll move on to the rest of the world. The segmented view says that with a third of the population using smartphones in the US and Europe, we've already sold to most of the world's population willing to pay for big data plans. In this view, data plan growth will start to slow in the US and Europe by sometime in 2012.

The best way to check which scenario is right would be to conduct some market research on user willingness to pay for data plans. If you work in a mobile tech company, you should be doing that, urgently. For those of us without six-figure market research budgets, there are some warning signs to look for. If the segmented view is correct, we should start seeing more price sensitivity as we use up the late adopters of data plans. One sign would be price promotions on smartphones...

AT&T's most recent iPhone advertising (link).

Another sign would be a shift in the mix toward lower-cost data plans...

Growth in data plans, 2010 vs. 2009. In all five countries, growth is higher in mid to low-tier plans (under 50 euros / 35 pounds a month). Source: Comscore (link)

This isn't conclusive evidence, but you don't get conclusive evidence until something has already happened. There's enough evidence that we should be talking very seriously about possible saturation of the user segment willing to pay for mobile data.

What it means

So to recap, in a few years I think the majority of phone users will have smartphones but won't necessarily pay for today's data plans. Some of the phones will connect to the web by WiFi only, while others will be on pay-as-you-go plans and won't be used for much data at all. The situation is analogous to what happened with cameraphones. Almost all of us have cameras in our phones, but most of us don't send picture messages because of the cost.

This stratification of data use will have some pretty profound impacts on the mobile market:

A change in the crisis. The first effect will be that we'd hear a lot less about the wireless bandwidth "crisis." Operators will all of a sudden feel a lot less pressure to expand their networks and get more spectrum. However, they will not be happy. Slowing data growth will probably make them miss their revenue forecasts, hurting their stock prices. Some operators may end up with excess capacity, resulting in renewed price competition in data plans, and putting more pressure on earnings. So instead of a bandwidth crisis we'll suddenly have an overcapacity crisis.

Pressure on mobile startups. Right now mobile apps are seen as a hot investment area because there's so much growth. There's a lot of venture capital available. If growth of mobile data slows, the rate of investment will slow also, as investors look for the next hot thing. This won't be a disaster for today's mobile app companies, but it would make life harder for new entrants. Also, companies that are investing on the assumption of endless growth might find themselves overextended.

Data will go a la carte. But the biggest change is that to make mobile data grow further, we'll need to entice people into using it. The challenge will be getting them to pay for little bits of data service, one app or one occasion at a time. This requires a different sort of data plan, different apps, and a different user experience on the phone...

Enticement becomes job one

A mobile data slowdown will create an enormous opportunity for smartphone companies and app developers to create a different sort of relationship with phone users. Most users will be perfectly willing to use data; they just won't want to pay for the plans. The single most important task for driving mobile data growth will be to gradually entice these people into using data a bit at a time. This creates several big business opportunities:

"Toll free" applications. Just as we enable toll-free phone numbers in which the recipient of the call pays, we should enable toll-free apps and websites in which the app or site vendor pays for the cellular data charge. I can picture several uses for this:
     --Some sites or apps might be willing to pay the data charge because they earn enough from ads to cover the cost. For example, I am willing to bet that Google and Bing would both pay the data charges for a mobile search on their sites.
     --Some sites or apps might be mobile supplements to paid PC web apps whose monthly service fee is large enough to cover the mobile data cost. This might apply to a music streaming service or a file storage service.
     --Some third parties might be willing to cover the service fees for an app or website. For example, the movie Rio sponsored a version of Angry Birds. Picture them doing the same thing with a web app that transfers data. They don't want the users hesitating to use their app, so they will pay the data charges.

Although it's easy to talk in the abstract about toll-free data apps and websites, it will be hard to implement them. We'll need a payment clearinghouse that standardizes and manages the transfer payments between developers and mobile operators. That was done for toll-free numbers, so I assume it should be straightforward, but there's still a lot of work to do.

We'll also need a way to let the users know about toll-free apps and websites. I think this is a task for the operating system -- it should identify the toll-free apps and sites automatically and enable them on phones that don't have data plans. The operators also have work to do, because they'll need to track the data used by the toll-free apps and make sure it's not charged to the user.

It might also be good to have a top-level web domain for toll-free mobile sites. I think .up (for "unpaid") is available.

There is also an important role for government here: Don't screw this up. We need to be sure that any net neutrality regulations don't accidentally ban toll-free sites and apps. It's possible that toll-free apps and sites will end up being the main way most people access mobile data, and it's critical not to cut off that possibility. (I'll discuss net neutrality in a lot more detail in the second and third parts of this post.)

After-sales billing is critical. Mobile and web developers have already figured this out: In many cases, your best chance of making money is to give away your base product and charge for upgrades and add-ons. That business model becomes even more important in a world where most users don't have a mobile data plan. How do you gradually get people hooked on your product when they're not willing to even pay for the cost of connecting to your website?

For some developers the answer will be that you just ignore those customers (and in that case you'd better base your forecast on selling to only a third of the population). But for other developers, there will be an art in figuring out how to write a very data-efficient app or website that delivers enough value to hook a user with a data charge so low that you can pay it, at least during a trial period. That sort of art is a great opportunity for differentiation.

Micropayment is critical as well. Because developers need to experiment in incremental billing, it's critically important that they be able to easily bill customers in very small amounts. The best system for doing that looks to be Google's recently-announced In-App Payments system, which is supposed to launch this summer. Google will charge a flat 5% of your revenue no matter how small the transaction. This is a huge improvement over PayPal and Amazon FPS, both of which charge 5% plus 5 cents per transaction (in other words, they take 40% of a 25-cent transaction).

If the operators want to facilitate this sort of billing through their own infrastructure, they'll need to match Google's terms. Operators that are wise enough to enable this may be able to build tight alliances with the most innovative websites and apps, but my guess is that most operators won't be able to get comfortable with a cut as small as 5%. In that case, they should just get out of the way and let Google (and its competitors) operate.

Smartphones must entice. This is a huge opportunity for companies that make handsets and mobile operating systems. Smartphones today are designed for unlimited data plans -- here's the browser, click away; here's the app store, download something. Those apps will be ignored by a user who has a limited data plan. Instead, the phone itself will need to show the user individual functions and apps they can use for small bits of money. Want directions? That'll cost you 25 cents. Want to download an ebook? That's a buck. Folks in Europe already understand this sort of world well, because so many users there are on pay-as-you-go plans. But to most Americans it's a new concept. Get used to it. Think of mobile data like an a la carte menu in a restaurant, except that for data the options are almost infinite -- so the phone will need to learn about the user and customize the offers to his or her particular interests.

This model of infinite customization and a la carte ordering requires a fundamental redesign of the user experience of the smartphone. That means it is a huge opportunity for differentiation, maybe the biggest single opportunity in mobile computing. Apple is the leading vendor in smartphones for people with large data plans. Although Android is catching up on many countries, often it seems to be selling to the more price-sensitive end of the market (note the lower sales of paid apps on Android compared to iPhone).   So it makes sense that the "enticement phone" would be built on Android. I'd like to think Google would do it, but intuitive and well-integrated user experience is not its strong suit. So maybe it'll be an Android vendor. Or maybe Nokia will do it. Or even Microsoft. Whoever gets it right first has a very good chance to be the other dominant smartphone vendor.

Or maybe Apple will do it first, and end up the leader in all smartphone price bands. It wouldn't surprise me.

What if I'm wrong?

So that's what I think is going to happen: there will be a natural slowdown in the growth of mobile data as we use up the customers willing to pay for it, and the most critical task for mobile data companies will be enticing people to use their services a bit at a time. But what if I'm wrong? What if the whole population is so excited about smartphones that everyone is willing to pay for big mobile data plans? How does the world look then?

I'll cover that tomorrow, in part 2 (link). In the meantime, please post comments and questions. This is a huge, complex issue, and I don't pretend to have it all figured out.

What's Next for RIM?

2011-06-17T00:33:00.000-07:00

Several people have asked for my thoughts on RIM's financial troubles. A computing platform runs on momentum. When the platform's growing, there's a virtuous circle between the growth of the customer base, the introduction of new products, and the arrival of new developers. Each one reinforces the others, and it produces strong, resilient growth. Look at Apple's current expansion for a great example.

But if that momentum breaks, the same forces that help you grow can create a self-reinforcing decline. The loss of customers reduces your resources, so you can't spend as much on new products, so developers are less excited, so you lose more customers, and so on. I lived through those cycles at both Apple and Palm, and they are very difficult to reverse once they gather momentum.

Based on RIM's latest financial report, it looks to me like the company may have fallen into a declining pattern in North America. Sales in the rest of the world seem to be doing better, which is masking the severity of the problem in the US. It's hard to say any of this for sure, because RIM doesn't release all that much detail. But here's what I think I am seeing in the numbers:

--As the chart below shows, sales were down compared to last quarter, only the second sequential revenue drop since fiscal 2006.

Revenue per quarter (RIM fiscal quarters)

RIM pointed out that sales were up year over year. They were, but...

--The year over year revenue increase was driven by a 67% increase in sales outside North America. If you look only at North America, sales were down about 18% year over year. (RIM didn't announce that number, but you can back it out from the reported increase in international sales compared to total sales).

In other words, RIM is growing strongly outside North America, but declining sharply in North America.

The most disturbing thing about the revenue decline is that it came in the quarter when RIM shipped the PlayBook. That should have increased revenue. The fact that North American revenue dropped anyway means the decline in North American BlackBerry smartphone sales was even worse than it seems. Edit: I did a back-of-the-envelope estimate of the revenue from PlayBook, and BlackBerry smartphone sales in North America must be down by well over 20% year over year.

--Device gross margins are down to 28%, a drop of three points from the quarter before. I suspect this is another sign of the mix shift away from North America -- RIM's sales in the rest of the world tend to be lower-cost units sold to young people, and those devices would have lower margins. It may also mean that RIM has been cutting prices in an unsuccessful effort to prop up sales in North America.

Company and hardware gross margins (RIM fiscal quarters)

As you can see from the chart, RIM's overall corporate margins (the blue line) did not drop as much as its hardware margins. That's because the company had a big increase in services revenue. Perhaps the service revenue from those international customers is better than the device revenue. Unfortunately, RIM doesn't release enough data to let me dig into that.

--Average sales revenue per device dropped $20, to $279. That is an all-time low. This may be due to the shift to international sales. It may also be due to price-cutting in North America. I am astounded that average revenue per unit sold dropped in the quarter when the (relatively expensive) PlayBook shipped.

Average revenue per device sold (RIM fiscal quarters)

--The shoe that hasn't dropped yet is channel inventory. RIM told us it had shipped 500,000 PlayBooks, but it didn't say how many of them have sold through to customers. It's easy to have one good quarter when you load the channel, but what matters is the sales in the next two quarters.

We also do not know how many BlackBerry units are sitting around in the channel. But one thing is certain, every time RIM's executives talk about how great their upcoming products will be, it gets a little bit harder to sell through those existing devices.

Netting it out, the sales pattern in North America looks disturbing. Pricing actions in North America don't appear to be increasing sales, and the PlayBook has not rescued the company. The silver lining for RIM is that its international sales are growing. But North America is half of RIM's revenue, so it has to be fixed if the company is to go back to rapid growth.

What happens next?

To restore momentum in a faltering platform, you need a hit product. Can RIM generate one? The company says it will accelerate the introduction of new products, which sounds sensible in the abstract, but if it's possible to develop products faster, why didn't RIM do it before? And considering RIM's history of shipping buggy devices, I tremble at what its products might look like if they were developed even faster.

RIM says it is going to do layoffs, which is probably necessary given the drop in revenue. But I wonder where the cuts will come from, and how big they will be. Do you lower staffing in North America, so you can focus more on the fast-growing international markets? If so, you may blow your chances of ever recovering the North American half of your business. Do you cut R&D? If so, I don't know how you get products to market faster. Do you focus on being a youth messaging phone? If so, how do you prevent Apple's new iMessage service from eating your lunch? Or do you try to do an across-the-board haircut of a certain percent of employees in every department? I went through some of those at Apple. They are easy for management to implement, but their net impact is fewer people trying to do the same work, and doing it poorly.

Meanwhile, there will be a morale problem at RIM. Ideally, you should announce layoffs on the same day you conduct them, so employees don't waste time worrying about whether they will keep their jobs. Instead RIM pre-announced the layoffs, which probably mollified investors but which will distract every person in the company for the next quarter while they prep their resumes. I have lived through that sort of uncertainty, and it is a productivity-killer.

The other hit to morale is going to be RIM's announcement that it will buy back up to 5% of its shares. At current market value, that is about $900 million in cash that could have gone into R&D or marketing or price cuts but will instead be used to prop up the stock price. If you're a RIM employee, the combination of layoffs plus stock buyback seems to say that management thinks the stock price is more important than the work you're doing.

What is the plan? You can't cut your way to broad growth; you have to cut and then focus on some key initiatives. Apple is a good example to keep in mind. It was in far, far worse shape than RIM, and came back very successfully. RIM can too. But Apple slaughtered huge numbers of projects and teams so it could focus on brand advertising, the iMac, and eventually the iPod.

So I'm waiting for RIM to tell me what its master plan is for restoring growth. So far all management has said is that the layoffs will be a "streamlining exercise" rather than a reorganization (link). That may imply an unwillingness to make hard choices, or it may just mean they are not yet willing to discuss their plans. Either way, before we can evaluate RIM's prospects, I think we need to know more about what it's going to kill (if anything), and which initiatives it will focus on obsessively.

Windows 8: The Beginning of the End of Windows

2011-06-02T10:55:00.000-07:00

I have a longstanding rule for evaluating new tech products: Don't judge anything by the demo. I've seen far too many product previews that hid fundamental flaws in usability. Until you can touch and play with the product on your own, seeing the little details of fit and performance that make it delightful or frustrating, you won't really know if it's worth your time.

So it's far too early to make any judgments on Windows 8, which Microsoft just previewed (link). There are an incredible number of ways it could go wrong.

But. I've got to say, this is the first time in years that I've been deeply intrigued by something Microsoft announced. Not just because it looks cool (it does), but because I think it shows clever business strategy on Microsoft's part. And I can't even remember the last time I used the phrase "clever business strategy" and Microsoft in the same sentence.

The announcement also has immense implications for the rest of the industry. Whether or not Windows 8 is a financial success for Microsoft, we've now crossed a critical threshold. The old Windows of mice and icons is officially obsolete. That resets the playing field for everybody in computing.

The slow death of Windows

When Netscape first made the web important in personal computing, Microsoft responded by rapidly evolving Internet Explorer. That response was broadly viewed as successful, but in retrospect maybe it was too successful for Microsoft's good. It let the company go back to harvesting money from its Windows + Office monopoly, feeling pretty secure from potential challengers.

Meanwhile, the focus of application innovation slipped away from Windows, toward web apps. New software was developed first on the Internet, rather than on Windows. Over time, Windows became more and more a legacy thing we kept because we needed backward compatibility, rather than a part of the next generation of computing.

Windows was our past, the web was our future.

This process was made very starkly clear by the iPad. Although the iPad is not a comprehensive PC replacement, and Apple has been very careful to say that, it is a very good PC replacement for certain tasks. And it has probably started to eat a hole in sales of notebook PCs, a very ominous change that should scare the daylights out of the people in Redmond.

To me, Windows 8 is the first sensible response by Microsoft to the strategic challenge it faces from the web. It apparently introduces not just a new user interface, but also a new programming model that embraces web technologies and integrates them with Windows resources and APIs.

I need to see a lot more on that programming model: How will Windows web apps really work, which APIs are available, how will these apps be sold and discovered, and on and on. Ars Technica had a great question: What's the visual paradigm for apps that want to look modern but aren't appropriate for touch? (link):

"There are plenty of applications that are too complex and fiddly to ever be at home with a touch-first interface—consider a software development environment, or a fully-featured office suite. Leaving these stuck in a Windows 7 ghetto doesn't seem like a good long-term option."

But at least Microsoft is finally trying. The alternative was to cling to the past and be a stationary target, gradually eaten away by the iPad and Android and Chrome and smartphones and whatever else the web world cooked up.

The risk

There's a downside in all of this for Microsoft. By embracing the next generation of computing, Microsoft is obsoleting its current products.

You can see this effect just by watching the Windows 8 preview video (link). The new interface and its applications look fluid and roomy and relaxing to use. The interface is smooth and playful. And then they switch into Windows compatibility mode and there's an explosion of crapola on the screen. It almost made me gag.

John Gruber says this is a fundamental flaw in Microsoft's approach (link), as does Jason Snell at Macworld (link). I understand what they're saying -- when you're working on a new paradigm, you don't want to be distracted by any baggage from the old one. But for Microsoft, this is about more than just responding to the iPad. It's the company's next computing paradigm, a change as fundamental as the transition from DOS to Windows. The thing that made the Windows transition work was that Microsoft protected the customers' investment in old applications and data. You could keep using your old DOS applications while you gradually got used to Windows.

So users will have an interesting choice. Apple, with iOS, is making a clean break with the past. So are Chrome and Web OS. Microsoft is trying to cherry-pick the best of iOS and WebOS and Chrome, and wrap that into a product that's also backward-compatible. Let's see, cleaner design versus backward compatible...where have I seen that before? Oh yeah, Mac vs. Windows, 1990. I was at Apple at the time, and backward compatibility was the magic key that kept the PC installed base loyal. I'm sure Microsoft knows that, and they're looking to run the same play again. Since they are not likely to create something even slicker than Apple, I think they're absolutely right to maintain compatibility in their new product. It's really their only choice.

Old Windows apps running inside Windows 8 do look awful. But so did DOS inside Windows 3.0, and that didn't stop people from buying it.

Microsoft will pay a serious price for the Windows 8 announcement. Most PC users haven't yet upgraded to Windows 7, and some Microsoft execs have been bragging in public about the revenue to come from upgrading all of those people. Forget about it. I think you'd be an idiot to buy Windows 7 for an existing PC when you know Windows 8 is coming. It would be like buying a horse-drawn carriage after Ford announced the Model T.

So there is a risk (actually, a likelihood) that Microsoft will stall its own revenue this year. I'm surprised that it is previewing Windows 8 so early, when it won't even have more details until its developer conference in September. And who knows when the new OS will actually ship; ArsTechnica guesses it'll be the second half of 2012, which usually means December. That means we're in for up to 18 months of vaporware. If I had to pick a fundamental flaw in Microsoft's approach, I'd point to that 18 month delay. It's way too long. It should have been nine months maximum.

Hey Microsoft, does no one there remember Osborne Computer (link)? You can destroy a tech company by pre-announcing your next generation product before it ships. Luckily for Microsoft, most PC companies don't have an immediate alternative to Windows, so it won't collapse the way Osborne did. I assume the folks at Microsoft were spooked by the competition and decided they needed to preannounce Windows 8 now to prevent Google Chrome from gaining momentum, or iOS from taking over, or some other alternative like Web OS emerging, now that HP is talking about licensing it (link). But the long delay raises the risks to WIndows. Microsoft has now bet its future on Windows 8. If it's late, or if it's not a great experience, that could turn into a very serious financial issue for the company, and it could invite customers to switch to something else. A few years from now we could look back at this as Microsoft's death rattle.

Or as its new beginning.

What it means to the rest of us

The history of platform transitions is that they are huge opportunities for developers. They reset the playing field for apps and devices. Look at the history: The leaders in DOS applications (Lotus, Word Perfect, etc) were second rate in GUI software. The leaders in GUI apps (Adobe, Microsoft, etc) were not dominant in the web. It's actually very rare for a software company that was successful in the old paradigm to transfer that success to the new one. Similar turnover has happened in hardware transitions (for example, Compaq rode the Intel 386 chip to prominence over IBM in PCs). And yes, there is a hardware transition as part of Windows 8, since it will now support ARM chips, and you'll want a touchscreen to really take advantage of it.

So if you're running an existing PC hardware or software company, ask yourself how a new competitor could use the platform transition to challenge your current products. Here's a sobering thought to keep you awake tonight: the odds are that the challengers will win. The company most at risk from this change is the largest vendor of Windows apps, Microsoft itself. Microsoft Office must be completely rethought for the new paradigm. You have about 18 months, guys. Good luck.

By the way, web companies are also at risk. Your web apps are designed for a browser-centric, mouse-driven user experience. What happens to your app when the browser melts into the OS, and the UI is driven by touch? If you think this change doesn't affect you, I have an old copy of WordStar that you can play with. Google and Facebook, I am talking to you.

If you're running a hardware company, how will you need to change your devices to take advantage of the new OS? Shipping a device that isn't Windows 8 ready will soon be as risky as shipping a PC in 1993 that couldn't connect a mouse. (Unfortunately, because Windows 8 is so far out, I don't know if Microsoft has even fully defined the hardware spec for a Windows 8 PC. The OS cries out for a flat panel screen that docks, so you can use it on your lap or as a monitor. Microsoft has a lot of work to do, and the PC vendors will face a lot of uncertainty.)

If you're starting up a software or hardware company, you should ask yourself what new opportunities will be created for you by Windows 8. What category of app or website will be made obsolete by this new operating environment, and can you seize it? (For starters, who's going to take down Office?)

And if you're making a competing platform, this is your opportunity to strike. Microsoft has given you more than a year's advance warning. The race is on to replace Windows. Can you create a better alternative? How will you protect the legacy apps and data of PC users? If you're looking to license, can you line up enough vendors, and a reference hardware design, to get to critical mass before Microsoft does?

I have no idea how this will all turn out, but finally after 20-plus years of GUI dominance on the desktop, fundamental change is at hand and the dice are rolling again.

This will be fun.

Can Google's Chromebook Break Windows?

2011-05-15T21:36:00.000-07:00

Summary. Google is right: Windows is an old, creaky, virus-ridden product that deserves to be replaced by something better. But to displace an established computing platform you need to do a lot of things right, and Google hasn't shown the focus and coordination needed to pull it off. Unless there are dramatic changes in Google's Chromebook plans, I think they are likely to fail.

Google's Chromebook vision is seductive: sleek and simple net-connected notebook computers, backed by the world's biggest web company, replace the bloated, unstable Windows PCs that dominate the desks and laps of the computing world. Google painted that picture at its IO developer conference last week, and it tantalized a lot of people:

"Google...might have just changed the industry." -Engadget (link)

"Microsoft could lose billions in sales to Google's Chromebook." -Beta News (link)

"Google Chromebooks will likely seduce businesses." -Tech Republic (link)

"Chromebooks may just be the next best solution for small to medium-sized businesses looking to untether from Microsoft Office." -PC World (link)

I wish it were true. Windows deserves to be replaced. It's just plain old, weighted down with decades of compromises and tweaks. The OS steadily degrades as you use it, and the security software companies will tell you privately that it's impossible to fully protect it from hostile software. I'm sure that with a clean start we could do better.

So I love Google's idea. Unfortunately, the Chromebook as currently defined is woefully unready to take on Windows. It may capture some niches and verticals, but it won't have a major effect on the industry unless Google makes major changes to it. And some of the biggest barriers to its success are inside Google itself.

In case you're a new reader to my blog, I should give you a brief background on myself, so you'll know where I'm coming from on this issue. I worked at Apple for a decade, where I was a front-line soldier in the Mac vs. PC war. I was part of Apple's competitive analysis team and later managed it, and I was in charge of the main Mac vs. Windows marketing team. Throughout that time, my co-workers and I spent a huge amount of time studying platform transitions -- how computing platforms were displaced in the past, and how could we apply those lessons to defeating "Wintel."

What we found was daunting. Once a computing platform is established, it's not enough to make a product that's better overall. You have to duplicate the core benefits of the current product, and be so much better in some areas that you overcome the users' natural resistance to change. Even when Mac had a graphical interface and the PC was still stuck with DOS, we could convert only a small fraction of the PC installed base. Users were too attached to their PC programs and all the arcane keyboard commands they had memorized to use them. Most people moved to graphical interfaces only after Microsoft offered Windows on the PC, which allowed them to keep access to their old software while they gradually came up to speed on Windows.

So when Google brags about the advantages of Chromebooks, I'm completely unimpressed because they are more than wiped out by the enormous sacrifices in basic compatibility and productivity that most people would have to make in order to move off Windows. The most fundamental problem is Google Docs.

There's no way to put this politely: As a replacement for Microsoft Office, Google Docs stinks. Its word processor is adequate but limited, its spreadsheet is rudimentary, and its presentation program is so awkward and inflexible that it makes me want to throw something. In terms of usability and features, Google Docs is about where Macintosh software was in 1987.

In fairness, there are some things Google Docs is great at. It's fantastic for collaborative editing; using Docs plus a Skype session can be a thing of beauty for brainstorming and working through a list of action items. But as a replacement for Office, the apps are so limited that using them is like watching a Jerry Lewis movie: you keep asking yourself, "why is this happening?" I tried very hard to use Google Docs as the productivity software for my startup, and eventually I gave up when it became clear that it was actually destroying my productivity.

If I sound frustrated, it's because I am. I remember back in 2005 when a startup called Upstartle created Writely, an online competitor to Microsoft Word. The product was evolving quickly, and as I wrote at the time, I thought it had a good chance of eventually growing into a real challenger to Word (link). Then Google bought Writely and bundled it into Docs, and I thought "that's even better, now development will really accelerate."

Instead, the evolution of the product has been snail-like. Six years after the acquisition, the word processor component of Google Docs is improved, but still very primitive compared to Word. The official Google Docs blog lists lots of new features the team is adding (link), but there are even more missing. For example, only last month did they add pagination to the word processor. Part of the problem is that the team is spending a lot of time adding features that have nothing to do with competing with Office. I sat through a session at Google IO last week on Google Docs, and the main theme was that they are transforming Docs into an online storage system like Dropbox or Box.Net. The team has added semi-random features like the ability to store videos, do OCR on photos, and sync between devices. Meanwhile, their presentation module can't even do transitions between slides.

Rather than doing the unglamorous work of competing with Office, the Docs team seems to be chasing after the latest shiny new startup category. Google says those sexy features were high-priority requests from Docs users, but if so that just shows what's wrong with Google's development process. The people it should be trying to please are current Office users, not the unusual people who were willing to give up Office for the current mediocre version of Docs. Get a roomful of Office users and ask them if they'd rather have OCR of photos or a printing architecture that works in most browsers. As Mom used to say, "you can't have dessert until you finish your peas." It looks like no one at Google is telling the Docs team to finish its peas.

The limitations of Google Docs are going to be unacceptable to most Office users. The problem is not that most people create slides with transitions, but they don't want to be cut off from that sort of advanced feature if they ever need it. The loss of potential future productivity is what keeps people away.

I know, I fought this battle extensively at Apple. There's a reason why apps have long feature lists -- the feature count drives sales.

Even if a user could come to terms with the limited features of Google Docs, good luck if you need to share your work with the majority of computer users who are still on Office. Moving documents back and forth between Office and Google Docs routinely mangles some of the features of Office documents. Now you're not just limiting your own productivity, you are annoying your business partners and coworkers.

Since Google does not seem to be focused on fixing Docs, it's theoretically possible that some other app developer could create an online replacement for Office that really works, and offer it on Chromebooks. But who would want to invest in that area when Google Docs is there as a competitor? Docs is just good enough to hinder innovation, but not good enough to take out Office.

Besides, Google did a couple of sessions at IO comparing web app development to native app development. They all concluded that web app development was better for content-playing applications, and that for productivity apps you need native software. And native software is exactly what Chromebooks won't run.

It makes you wonder if the app guys at Google ever talk to the Chrome guys.

So Google can say all it wants about long battery life, instant on, support costs, and invulnerability to viruses. Those are all problems that PC users put up with because they are unwilling to give up the advantages of Office and the rest of the PC apps base (think about it, if those issues really motivated people, Macintosh would have 80% share in PCs). I could picture an IT manager looking at the lower costs of Chrome and wanting to force users off Windows, but that will just produce a user revolt. I know very few IT departments that are willing to take on that sort of battle. Maybe some very cost-conscious schools and businesses might force users to switch to Chrome, but for the vast majority, as long as Office is not challenged, neither is Windows.

Ironically, if Google really wanted to replace Windows, Android would probably be a better OS for the job. It has more momentum, and you can write native software for it. But that's blocked by Google's own internal politics, which has assigned Android to phones and tablets and Chrome to PCs.

I like the Chromebook vision, and some day I'm sure something will replace Windows. But Google is utterly unready for the hard, unglamorous work needed to make Chromebook succeed, both in terms of its products and in terms of its internal organization. Unless Google makes major changes, Chromebook will probably be yet another failed Google initiative that will have us asking "what happened?" a couple of years from now.

Kind of like the way we talk about Jerry Lewis.

Three steps to fix Docs

If Google truly wants to replace Windows, it needs to focus Docs on that task. Stop the sexy but esoteric stuff like automatic translation of street signs in photos (something that most people don't really need their word processor to do), and make sure the basics like printing work properly. Here are my top three priorities:

1. Make it look like an application. The user interface in Docs is primitive, an awkward mix of web page and application. It is extremely intimidating to a normal user. Here's the window I get when I edit a word processing document in Google Docs:

You're looking at two inches of stacked-up interface cruft, including three separate menu bars and 58 different clickable items. Hey Google, aren't you embarrassed by this? I didn't think anyone could make the Office ribbon toolbar look efficient, but you managed to do it.

You might be saying to yourself, "well, that's just what happens when you run an app in a browser." That's no excuse. If you can't make a browser-based app easy to use, you should give up the pretense that you'll ever replace Windows.

2. Take full advantage of HTML 5. Google gave a great pitch at IO on all the wonderful new graphical features in HTML 5 and its associated technologies: groovy things like 3D transforms, text bound to a curve, animation, and huge numbers of fonts. Very little of this graphical power has shown up in Docs. Google should make Docs (and especially its presentation module) a showcase for the great things you can do with HTML 5.

3. Make Docs extensible. No matter how well Google focuses its development, it won't be able to quickly match all of the features in Office. That's why Docs desperately needs a plug-in architecture. One of the reasons WordPress became a leading weblog tool is because it enabled developers to easily extend it with a blizzard of widgets and add-on modules. Google should do the same with Docs. Then rather than Google being responsible for covering all the features of Office, the development community could share the burden. I bet that with the right plug-in architecture, and a widgets store built into Docs, Google could have a more complete office suite than Windows within 24 months. That would make Chromebooks a truly potent competitor to Windows, and a product worthy of Google's enormous skill and ambition.

Goodbye, IBM. Seriously.

2011-04-22T01:29:00.000-07:00

For those of us who worked at Apple in earlier days, the company's current success is sometimes surreal. I had one of those moments today. Back in the mid 1990s, we were struggling to get to $10 billion in revenue per year, a figure that seemed ridiculously high. This week, Apple reported quarterly revenue of $27 billion. Apple is almost certainly now a $100 billion a year company.

To put that in perspective, Apple is now larger than companies like Honda, Sony, Deutsche Telekom, Procter & Gamble, Vodafone -- and IBM. Apple is very close to passing Samsung and HP, which would make it the world's largest computing company.

In 1981, when IBM entered the PC business, Apple ran a big ad in the Wall Street Journal saying "Welcome, IBM. Seriously." At the time, everyone thought it was a very cheeky move by a tiny upstart company. No one -- and I mean absolutely no one -- would have believed that 30 years later Apple would be looking at IBM in the rear view mirror.

The spookiest thing is that Apple may still have a lot of room to grow in both mobile phones and tablets. There's no way the company can keep growing like this indefinitely, but it's very hard to predict exactly when it'll slow down.

Quick Takes: The RIM Tragedy, Lame Market Research, Ebooks Closer to Tipping, Flip vs. Cisco, Google as Microsoft, Nokia and the Word "Primary"

2011-04-21T12:16:00.000-07:00

Short thoughts on recent tech news...

RIM as Greek tragedy

I wrote last fall that I was worried about RIM's financial stability (link), but I never expected the company to start inflicting damage on itself. RIM has always come across as a calm, dependable company. Maybe not as flashy as some other firms, but reliable and smart. But as we approached the PlayBook launch, the company has started to look like its own worst enemy.

It's clear that the PlayBook was designed initially as a companion device for people who have BlackBerry phones, and only those people. That's an interesting choice -- not one I would have made, but I can see RIM's logic. But apparently RIM decided late in the game that it needed to market the tablet to a broader range of customers. It started talking up the features those users would need, without making clear that the features would not be included in the device at launch. Many of the things the company has been touting -- such as Android app compatibility and the ability to check e-mail messages independently of a BlackBerry -- were not available when the device shipped. RIM has been marketing vaporware. That guarantees disappointed reviews that focus on what the device doesn't do, rather than what it does. Check out Walt Mossberg's write-up (link).

While this has been going on, RIM co-CEO Mike Lazaridis has been compounding the problem by creating a personal reputation as a loose cannon. His latest escapade was ending a TV interview with BBC when they asked about security issues. The use of the word "security" was mildly provocative, but if you've ever dealt with the British press, you know they specialize in goading people to get an interesting reaction. The more senior your title, the more they'll poke at you, to see if you can take the heat.

The way this game works, there are several techniques you can use to deal with an aggressive question. You can laugh at it, you can calmly point out the flaw in the question, you can answer it earnestly and patiently, and you can even pretend not to understand it (I did that once on a UK TV show and it drove the interviewer crazy because he didn't have time to rephrase the question). But the one thing you can't do is stop the interview. If you do that, the BBC will post a clip of you online that makes you look like a gimlet-eyed prima donna (link).

The fact that Lazaridis did this means either he's losing personal control under pressure, or not being properly briefed by his press people, or both. Whatever the cause, it is unprofessional, and it's making RIM's challenges harder.

If you want to understand the damage being done, you can read the forward-looking obituary of RIM that Slate just ran (link). Or check out this column by Rob Pegoraro of the Washington Post (link). Rob's a very fair-minded, professional journalist who isn't given to hyperbole. But he called Lazaridis' actions "profoundly foolish from any sane marketing perspective...Seriously, does RIM not realize whom it’s competing with? The company is all but begging to get crushed by Apple."

I haven't written off RIM by any means. They have a huge customer base, a great brand, and a long history of overcoming skepticism from people like me. I hope they can do it again. But at a minimum, RIM's management needs to recognize that they do not have the marketing skills needed to play in the world of increased smartphone competition. They need professional help, immediately. And I worry that the marketing problems are actually symptoms of much deeper disorder within the company.

The lamest market research study of the year

It's still early in the year, but I think someone's going to have to work pretty hard to do a lamer market research study than Harris Interactive's EquiTrends survey of mobile phone brands in the US. Harris says the survey indicated that Motorola has the most "brand equity" of mobile phone brands in the US, followed by HTC, Sony Ericsson, Nokia, and Apple. Harris also provided a nice chart of the results (link):

There are a couple of problems here. The first is that the reportedly best-selling mobile phone brand in the US, Samsung, was not included in the results (link). Oops.

The second problem is that Harris doesn't directly measure brand equity (which is a pretty fuzzy concept anyway). What it measures is "Familiarity, Quality, and Purchase Consideration." Those three ratings were combined into an overall brand equity score.

So this is a made-up rating created through a mathematical formula that Harris hasn't shared with the public, as far as I can tell. But Harris assures us that it's meaningful: "Those companies with high brand equity are able to avoid switching behaviors of those brands that lack brand equity." (link). So, according to Harris's research, people in the US should be switching from other phone brands to Motorola.

But in the real world, the exact opposite has been happening. Motorola has been losing share. The number three rated brand, Sony Ericsson, has barely any distribution in the US, so it doesn't have much share to lose. The number four brand, Nokia, has lost most of its US share.

Harris argues that Apple's mediocre score is driven by the sophistication of the iPhone: "There is still a large audience of consumers that aren’t interested in a smartphone running their life, and Apple doesn’t have a product to meet that need." I think that's correct, but HTC also sells only smartphones, and it was ranked number two.

And oh by the way, what's the margin of error in Harris's survey? I can't find it disclosed anywhere, but my guess is that it's several points plus or minus, in which case everyone except Motorola is in a statistical tie. That wouldn't have made for a cool looking marketing chart, though.

It's been distressing to see websites pick up the Harris story and repeat it without questioning the results. PC Magazine swallowed it whole (link), as did MocoNews (link). A lot of other sites reprinted the Harris press release verbatim. Even if you didn't dig into the flaws, the study ought to fail the basic sniff test of credibility -- does anyone really believe that HTC has a stronger brand in the US than Apple?

When I worked at Apple and Palm, we hated synthetic brand rating studies like this one (and the JD Power ratings, which are similar) because the results depend more on the secret formula used by the polling company than on the actual behavior of customers. The polling companies construct these special methodologies because they can then sell long reports to the companies surveyed explaining the results, and also charge the winners for the right to quote the results in their marketing. Check out the fine print at the bottom of the Harris press release: "The EquiTrend® study results disclosed in this release may not be used for advertising, marketing or promotional purposes without the prior written consent of Harris Interactive." I don't know for sure that Harris charges to quote the survey, but that's the usual procedure.

The lesson for all of us is that you should never accept any market research study without looking into its background, even if it comes from a famous research company.

Ebooks: Here comes the tipping point

The continued strong sales of iPad, Kindle, and Nook in the US are bringing us steadily closer to the tipping point where it will pay an author to bypass paper publishing and sell direct to ebooks. The latest evidence is from the Association of American Publishers, which reported that ebooks made up 27% of all book revenue in the US in January-February 2011 (link). AAP correctly pointed out that the ebooks share was raised temporarily by people buying ebooks to read on all of the e-readers they got for Christmas. The share will go down later in the year.

Still, at any share over about 20%, it will be more economical for an established author to self-publish through ebooks (where they can retain 70% of sales revenue) rather than working through a paper publisher (where they get at most 15% of revenue). When we hit that point on a sustained basis, I expect that a lot of authors will move to electronic publishing quickly.

It looks like we'll hit that point sometime this year or next.

Flip aftershocks

Silicon Valley has the attention span of a toddler in a candy store, but it was interesting to see how people around here lingered on the story of Flip's demise several days after the announcement. There were dark suggestions of ulterior motives at Cisco -- that they had bought the company to strip it of its intellectual property (link) or that they shut it down a viable company only so they could look decisive to Wall Street (link). And that was just the stuff in the press. I've heard even more pointed speculation from people working in Silicon Valley.

My guess is the real story is a lot more complicated and nuanced, but at this point it doesn't matter. Killing Flip may have helped Cisco with Wall Street analysts, but the sequence of buying Flip and then shutting it down has seriously damaged the company's image in Silicon Valley as a leader and a partner. Silicon Valley is a very forgiving place. You can make huge strategic mistakes, and waste billions of dollars, and still you'll be forgiven as long as you did it in sincere pursuit of a reasonable business idea. But Cisco's senior management is now viewed as either overconfident to the point of stupidity, or as the deliberate torture-murderer of a beloved consumer brand. I've rarely seen this level of hostility toward a management team, and I don't think they will be forgiven anytime soon, if ever.

Does that have any practical impact on Cisco's business? Not immediately; business is business. But it will probably be a little harder for Cisco to make alliances and hire ambitious people in the future.

Google 2011 = Microsoft 2000?

It's spooky how Google is sometimes starting to remind me of Microsoft circa 2000.

The latest incident was a quote from a Google executive saying that the company wants iPhone to grow because Google makes a lot of money from it (link). Microsoft used to say the same sort of thing about Apple, claiming that it made more when a Mac was sold rather than a Windows PC (link). (The idea was that many Microsoft apps were bundled with Windows at low cost, whereas Mac customers bought Microsoft apps at retail.)

In both cases, the statements may be technically true, but what they really point out is that the company has deep internal conflicts between its various business units. Yes, part of Microsoft wanted to make Macintosh successful, but another part of Microsoft wanted to kill Macintosh. Microsoft as a whole wanted to do both at the same time, which created internal confusion. Add in antitrust lawsuits by governments and Wall Street pressure for quarterly growth, and Microsoft quickly became distracted, inwardly focused, and slow-moving.

Parts of Google, I'm sure, think iPhone is great and want it to grow. But I guarantee that the Android team is trying to kill iPhone (and Nokia, and HP/Palm). Google has its own set of government distractions, plus a big old lawsuit from Oracle, plus legal action by Microsoft and Apple against Android licensees.

There are huge differences between Google and Microsoft, of course. Google is not under the same sort of Wall Street pressure that was applied to Microsoft, and Google's founders have not lost interest in running the company.

But it's disturbing to see how quickly some of Microsoft's symptoms are showing up at Google.

Hey Nokia, how do you define "primary"?

Microsoft and Nokia said they have finalized the contract for their alliance. There were a couple of interesting tidbits in the announcement:

--Both companies said they completed the negotiations sooner than they expected. Usually that sort of statement is hype, but for an agreement of this size, it actually was a pretty fast turnaround.

--They went out of their way to say that Nokia will be paying royalties for Windows Phone similar to what other companies pay. That's important legally and for regulators, so companies like Samsung can't complain that Microsoft is giving discriminatory pricing. At the same time, the announcement also made it clear that Microsoft will be passing a ton of money to Nokia for various services and IP, which Nokia wanted on the record to help with its investors. I think the net effect will be that Nokia gets a free Windows Phone license for a long time. That will not please Samsung, HTC, and the other Windows Phone licensees, because it puts them as a price disadvantage.

--The companies are apparently cross-licensing a lot of patents. I wonder if this will help Nokia with its IP warfare against Apple.

--In an interview with AllThingsD (link), Microsoft and ~~Google~~ Nokia said Windows Phone was Nokia's "primary smartphone operating system." That leaves open the door for Nokia to play with other smartphone operating systems, and it leaves completely unanswered the question of tablets. I'm sure the Symbian/Meego fans will be all over that as a ray of hope for their platforms, but to me it just leaves some prudent wiggle room for Nokia in the future. I'd love to know how the agreement defines the words "smartphone" and "primary" -- or if it even has definitions for them.

(Note: Edited on April 22 to fix an embarrassing typo.)

The Real Lesson of Cisco's Billion-Dollar Flip Debacle

2011-04-12T13:13:00.000-07:00

Cisco announced that it's closing down the Flip camera business and revisiting its other consumer products. With a purchase cost for Pure Digital (maker of Flip) of over $600 million, and now restructuring charges of $300 million (link), the total cost of Cisco's failed consumer experiment is probably north of a billion dollars, making it one of the larger business debacles in Silicon Valley in the last few years.

Most online analysis of the announcement doesn't really explain what happened. The consensus is that Flip was doomed by competition with smartphones, but that says more about the mindset of the tech media than it does about Cisco's actual decisions. I think the reality is that Cisco just doesn't know how to manage a consumer business.

There are important lessons in that for all tech companies.

Here are some samples from today's online commentary:

Gizmodo (link): "The Flip Camera Is Finally Dead—Your Smartphone’s Got Blood on Its Hands."

Engadget (link): "Cisco CEO John Chambers says the brand is being dispatched as the company refocuses, done in by the proliferation of high-definition sensors into smartphones and PMPs and the like."

ReadWriteWeb (link): "Single-purpose gadgetry has no place in today's smartphone-obsessed world."

ArsTechnica (link): "Flip can't be faring well against the growing number of smartphones with built-in HD cameras. The quality of your typical smartphone video camera is comparable to the Flip, and people have their phones on them all the time."

Computerworld (link): "More and more people are using their smartphones to take lower-quality video...the market for low-cost small video cameras that produce quick-and-easy videos is dead."

There's an old saying that when all you have is a hammer, every problem looks like a nail. We need a similar proverb for news analysis -- when you're obsessed with smartphones, every market change looks like it was caused by them.

But did smartphones alone kill Pure Digital? Two years ago, it was the most promising consumer hardware startup in Silicon Valley. It had excellent products and a rabid customer base. Two years later, it's completely dead. That's a lot to blame on phones. Plus, Cisco appears to be moving away from driving consumer markets in general. The Umi videoconferencing system is being refocused on business, and Cisco CEO John Chambers said, "our consumer efforts will focus on how we help our enterprise and service provider customers optimize and expand their offerings for consumers, and help ensure the network's ability to deliver on those offerings." In other words, we'll be working through partners rather than creating demand on our own (link).

Smartphones didn't cause all of that. But they did play a supporting role in the drama. They commoditized Flip's original features, putting the onus on Cisco to give it new features and innovations. As Rachel King at ZDNet pointed out (link), Cisco failed to respond:

"The technology of Flip never really evolved since then, making it a very stale gadget. Sure, even once Cisco picked up Flip, new models continued to come out each year. Yet Cisco dropped the ball by never pushing further with Flip. It never moved beyond 720p HD video quality, and it never got HDMI connectivity."

Presenting a stationary target is enough to doom any consumer electronics product. For example, what would have happened if Apple had stopped evolving the iPhone after version 1? You'd have no app store, no 3G. Today we'd be talking about iPhone as a cute idea that was fated to be crushed by commodity competition from Android.

Just the way we're talking about Flip.

The important question is why Cisco failed to rise to the challenge. Why didn't it innovate faster? I don't know, because I wasn't there, but I'm sure the transition to Cisco ownership didn't help. It was not a simple acquisition. Cisco didn't just buy Pure Digital and keep it intact, it merged the company into its existing consumer business unit, which was populated by consumer people Cisco had picked up from various Valley companies in the previous few years. Some of the key Flip managers were given new roles reaching beyond cameras, and there must have been intense politics as the various players jockeyed for influence.

Then there was the matter of Cisco's culture. I had a great meeting at Pure Digital several years ago, prior to the merger. They were housed above a department store in San Francisco, in a weird funky space with lots of consumer atmosphere. The office was surrounded by restaurants and shops.

In contrast, visiting Cisco is like visiting a factory. Every building on their massive campus looks the same, with an abstract fountain out front, the walls painted in muted tans and other muddy colors. The buildings are surrounded by an ocean of cars. The lobbies are lined with plaques of the company's patents, and the corridors inside have blown-up photographs of Cisco microprocessors. In the stairwells you'll usually see a couple of crates of networking equipment, shoved under the stairs. And all of the cubicles look the same.

The Cisco campus.

A typical Cisco building.

Cisco is an outstanding company, and an excellent place to work. But it screams respectable enterprise hardware supplier. To someone from a funky consumer company, going there would feel like having your heart ripped out and replaced with a brick.

Then there were the business practices to contend with. As an enterprise company, Cisco is used to long product development cycles, direct sales, and high margins to support all of its infrastructure. A consumer business thrives on fast product cycles, sales through retailers, and low margins used to drive volume. Almost nothing in Cisco's existing business practices maps well to a consumer company. But it's not clear that Cisco understood any of that.

The transition to Cisco management happened at a terrible time for Flip. Just when the company's best people should have been focused obsessively on their next generation of camera goodness, their management was given new responsibilities, and Cisco started "helping out" with ideas like using Flip cameras for videoconferencing -- something that had nothing to do with Flip's original customers and mission.

If Pure Digital had remained independent, would it have innovated quickly enough? Maybe not; it's very hard for a young company to think beyond the product that made it successful. But merging with Cisco, and going through all of the associated disruptions, probably made the task almost impossible.

I'm sure that as the Flip team members get their layoff notices, we'll start to hear a lot more inside scoop. But in the meantime, this announcement by Cisco looks like a classic case of an enterprise company that thought it knew how to make consumer products, and turned out to be utterly wrong.

That's not an unusual story. It's almost impossible for any enterprise company to be successful in consumer, just as successful consumer companies usually fail in enterprise. The habits and business practices that make them a winner in one market doom them in the other.

The lesson in all of this: If you're at an enterprise company that wants to enter the consumer market, or vice-versa, you need to wall off the new business completely from your existing company. Different management, different financial model, different HR and legal.

You might ask, if the businesses need to be separated so thoroughly, why even try to mix them? Which is the real point.

The other lesson of the Flip failure is that we should all be very skeptical when a big enterprise company says it's going consumer. Hey Intel, do you really think you can design phones? (link) Have you already forgotten Intel Play? (link)

I'll give the final word to Harry McCracken (link): "You can be one of the most successful maker of enterprise technology products the world has ever known, but that doesn’t mean your instincts will carry over to the consumer market. They’re really different, and few companies have ever been successful in both."

Right on.

The Five Most Colossal Tech Industry Failures You've Never Heard Of

2011-04-01T00:08:00.000-07:00

The tech industry is famous for forgetting its own history. We're so focused on what's next that we often forget what came before. Sometimes that's useful, because we're not held back by old assumptions. But sometimes it's harmful, when we repeat over and over and over and over the mistakes that have already been made by previous generations of innovators.

In the spirit of preventing those repeated failures, I spent time researching some of the biggest, but most forgotten, failures in technology history. I was shocked by how much we've forgotten -- and by how much we can learn from our own past.

5. Atari Suitmaster 5200

Video console manufacturer Atari was notorious for its boom and bust growth in the 1980s. The company's best-known failure was probably the game cartridge ET the Extraterrestrial, which Atari over-ordered massively in anticipation of hot Christmas sales that never materialized. Legend says that truckloads of ET cartridges were secretly crushed and buried in a New Mexico landfill.

What's much less well known is that Atari was also involved in the creation of an early motion-controller for home videogames, a predecessor of Microsoft's Kinect. Since video detection technology was not sufficiently advanced at the time, the Suitmaster motion controller consisted of a bodysuit with 38 relays sewn into the lining at the joints, plus 20 mercury switches for sensing changes in position. The suit was to be bundled with the home cartridge version of Krull, a videogame based on the science fiction movie of the same name.

A massive copromotion was arranged with the producers of Krull, and Atari made a huge advance purchase of Suitmaster bodysuits and cartridges. Unfortunately, development was rushed, and late testing revealed two difficulties. The first was that the suit's electromechanical components consumed about 200 watts of power, much of which was dissipated as heat. That may not sound like much, but imagine jamming two incandescent light bulbs under your armpits and you'll get the picture. There were also allegedly several unfortunate incidents involving mercury leaks from broken switches, but the resulting lawsuits were settled out of court and the records were sealed, so the reports cannot be verified.

The Christmas promotion was canceled, but Atari didn't give up on the Suitmaster immediately. The next year, it was repurposed as a coin-op game accessory, allowing the user to control a game of Dig Dug through gestures. Sadly, Atari's rushed development caught up with it again. Due to a programming error in the port to Dig Dug, under certain obscure circumstances when Dig Dug got flamed by a Fygar the suit would electrocute the player. (The bug was discovered by an arcade operator trying out the game after hours, in what is now memorialized in coin-op gaming circles as The Paramus Incident). That was the last straw for Atari's corporate parent, Warner Communications. To limit its potential liability if a Suitmaster were to fall into public hands, Warner arranged to have the entire inventory chopped up and mixed into concrete poured into a sub-basement of the Sears Tower in Chicago, which was then undergoing renovation.   A small bronze plaque in the third sub-basement of the Sears Tower is the Suitmaster's only memorial:

4. eSocialSite.com

Before Facebook, before MySpace, even before Friendster, the most successful social networking site on the web was eSocial. Largely forgotten today, eSocial thrived in the late 1990s as usage of web browsers took off on PCs. By 1998, it had reached more than 50 million users worldwide, an unheard-of success at the time. Its Series A fundraising in 1999 raised more than $132 million from a consortium of VCs led by Sequoia Capital. Many people still cite eSocial's Super Bowl ad in January 2000, which featured a singing yak puppet, as a classic of the dot-com bubble era. When the company went IPO in February 2000, its stock price made it the 23rd most valuable company in North America.

Unfortunately, just two months later, it was revealed that 99.999974% of eSocial's registered users were fake people simulated algorithmically by a rogue eSocial programmer. The other 13 were middle school students from Connecticut who were technically too young to sign up for the service. eSocial was sued for allowing underage users, which delayed critical service upgrades for several months. By the time the litigation was resolved, Friendster had seized the initiative, and eSocial was quickly forgotten.

eSocial found a second life overseas, though, and today it is still the leading social site in several former Soviet republics in Central Asia. The founders of eSocial have long since left the company, and today are active in Wikidoctor.org, a promising new site that enables people to crowdsource the diagnosis of diseases and other chronic health problems.


3. The cardboard aeroplane

It's an unfortunate fact that wartime is a great stimulator of innovation. Desperation leads countries to try all sorts of crazy ideas. The successful ones become famous, while the failures are usually forgotten.   For example, you don't hear much today about Britain's World War II plan to turn icebergs into aircraft carriers (link).

Even more obscure was the effort to create an aircraft from cardboard. One of the greatest bottlenecks in aircraft construction during the war was the shortage of aluminum feedstock. Britain could not expand aluminum production quickly enough to meet its needs, so it attempted to substitute the output from the Empire's massive Canadian paper mills. The idea of a cardboard airplane sounds crazy at first, but cardboard can be incredibly rigid in some directions (as you've found if you've ever tried to smash a box for recycling). Through the proper use of corrugation in multiple directions, the British found that they could create a material with the same tensile characteristics as aluminum, with only slightly greater weight.

Early flight tests of the cardboard aircraft were not encouraging, as the first two test planes broke up suddenly in mid-flight. Subsequent investigation revealed that water was infiltrating the corrugations, and then freezing when the plane reached altitude. The expansion of the ice caused the cardboard to delaminate, resulting in failure of the airframe.

But the engineers persevered, sealing the cardboard with paraffin wax to waterproof it. These new models successfully completed flight tests in the UK, and were demonstrated for Winston Churchill in 1943, who endorsed them enthusiastically.

The new aircraft were deployed to North Africa, where another unfortunate problem appeared: the paraffin melted in the desert heat, causing the planes to wilt on the tarmac. Needless to say, this limited their effectiveness. The British engineers persevered, eventually creating a new waterproofing scheme utilizing used cooking oil. This not only waterproofed the planes, but also made them smell like fish & chips, a definite plus to homesick British airmen. Unfortunately, wartime supplies of cooking oil in Britain were limited, and by the time alternate supplies could be imported from the America South, the war was nearly over.

The cardboard airplane disappeared into history, but its spirit lives on (link).

2. The microwave hairdryer

The 1950s and 1960s were the golden age of innovation in electronics. Companies like HP, Varian, and Raytheon created amazing new devices, often adapted from wartime technologies. One example was the microwave oven, which was derived from radar.

But microwaves were once used for a lot more than cooking food. My dad worked in the electronics industry at the time, and he often told me stories about the remarkable new product ideas he worked on. One was the microwave hairdryer.

Today we're frightened of microwaves because they're "radiation," and that's assumed to be bad. But in the 1960s people understood that microwaves had nothing to do with nuclear radiation. They were just another tool that you could use to get things done, like arsenic or high voltage electronics. Engineers at my dad's employer (which he asked me not to name) were looking for new ways to use microwaves to solve everyday problems. Someone noted the number of hours women spent under rigid-hood hairdryers, used to finish the elaborate hairdos that were prevalent in the 1960s, and realized that a microwave hairdrying helmet could do the same job in just 45 seconds -- creating a massive increase in national productivity.

Unfortunately, the microwave hairdryer ran into a series of technical problems. The first was that the microwaves caused metal bobby pins and hair clips to arc, which frightened customers and gave their hair an unattractive burned smell. That was solved by substituting plastic clips. The second problem was that the microwave frequency that couples best with wet hair is very close to the frequency that couples best with blood plasma. This required some precise adjustments to the three-foot-long Klystron tubes that powered the hairdryers. If they were jostled there was a very slight risk of causing the client's blood to boil (although this never actually happened in practice).

The technical problems were eventually resolved, but the death knell to the microwave hairdryer was something no engineer could fix: a sudden change in hairstyles in the late 1960s. The move toward long straight hair, frequently unwashed among younger people, caused a collapse in the hairdryer market, from which it has never recovered.

There was an abortive attempt to create a microwave blow dryer in the 1970s, but it was pulled from the market when it caused LED watches to burst into flame.

1. Apple Gravenstein

During the Dark Years when Steve Jobs was away, a rudderless and confused Apple Computer churned out a long series of failed initiatives. Their names echo faintly in tech industry history: CyberDog, Taligent, Kaleida, OpenDoc, HyperCard, Pippin, eWorld, emate, A/UX, the 20th Anniversary Macintosh, Macintosh Portable, QuickTake, the G4 Cube (oh, wait, Steve did that one), Newton, and so on.

But the most catastrophic failure was the one Apple worked hardest to hush up, the project called Gravenstein. Simply put, Gravenstein was Apple's secret project to produce an electric automobile.

In the late 1980s, Apple was growing like a weed, but the driver of its growth was the Macintosh product line initiated under Steve Jobs. John Sculley and the rest of Apple's senior management team were concerned with securing their historical legacy by doing something completely different. Sculley, noting the chaos caused in the world economy by the oil embargo of the 1970s, chose to focus on the creation of an all-electric car. Michael Spindler, ironically nicknamed "Diesel," was chosen to manage the production of the vehicle. Bob Brunner drove the overall design, but Jean-Louis Gassee was asked to do the interior, on account of he's French and has good taste.

Apple used its Cray supercomputer to craft a unique teardrop aerodynamic shape for the car. Apple purchased all the needed parts, and planned to begin production in its Fremont, California factory. To prepare the market for the car, Sculley started working automobile references into Apple's advertising. The most famous of these was the "Helocar" advertisement (link).   If you watch the ad closely, you can see actual diagrams of the Gravenstein's design and aerodynamic shape, although of course the first version of the car was not intended to fly.

Unfortunately, the public response to the Helocar ad was so overwhelmingly negative that it frightened Apple's Board of Directors. Sculley was ordered to scrap the Gravenstein project, and all documents related to it were shredded and then burned. Although Gravenstein never came to market, its legacy affected Apple's products for decades to come. The Macintosh Portable, for example, used bulky lead-acid batteries that were originally intended to power Gravenstein. And many years later, Jonathan Ive reused the Helocar's aerodynamic shape in the design of the original iMac.

Those are my five top little-known tech failures of all time. What are yours? There are many other candidates. Honorable mentions should include Leonardo da Vinci's steam-powered snail killer, Thomas Alva Edison's notorious electric bunion trimmer, spitr.com, and of course Microsoft Bob.

You can draw many lessons from these failures, but to me the most important lesson of all is that you can't trust blog posts written on this particular date.

Posted April 1, 2011

Quick Takes: Nokia's culture, RIM's interface, and living in the paradigm of engineers

2011-02-24T22:31:00.000-08:00

This post is an experiment. I sometimes run across information that I think is worth sharing, but that doesn't fit into my usual publishing tools. Generally it'll be something too complicated to tweet, but too simple for one of my usual long blog posts. I've decided to try compiling those tidbits into an occasional post, which I call "Quick Takes."

Please let me know if you find this useful.

This time I want to talk about the aftermath of the Nokia-Microsoft deal, Android on BlackBerry, wireless insecurity, and WikiLeaks as a model for the future of human society.

More aftershocks from the Nokia-Microsoft deal

In the flood of commentary about Nokia's deal with Microsoft, I ran across three items with interesting perspectives on the deal. They helped me understand how much work Nokia still needs to do. If you're interested in the deal, or just in organizational change, I think they're worth checking out...

The engineering-driven culture. Adam Greenfield, a former Nokia employee, discussed Nokia's culture and explained how it produces wonderful mobile phone devices but poor user experiences (link). The key sentence:

The value-engineering mindset that’s so crucial to profitability as a commodity trader is fatal as a purveyor of experiences.

When I've written in the past that Nokia needs to learn how to do real product management, this is what I was trying to say.

This is how it feels to have an alliance dumped on you. Meanwhile, if you want to get a sense of how corporate alliances get built, check out Engadget's interview with Aaron Woodman of Microsoft (link). Aaron is a Microsoft spokesman and a key player in the Windows Phone team, so you might expect him to know chapter and verse about the plans for the alliance with Nokia. But he doesn't, and you can feel his discomfort as Engadget tries to pin him down on some details:

Q: There will be no preferential treatment given to Nokia in terms of the level of customization that they can apply to their devices. Is that correct, or no?
A: So it's an interesting question -- you say, like, preferential treatment, so say more about that. Is that like oh, they can modify...

The reality is that a big corporate alliance is created from the top down. Senior management negotiates the broad outlines, and then announces the deal (because it's material to both companies and has to be announced to prevent insider trading). Then the mid-level employees have to painstakingly work out what the agreement actually means. I believe that's happening as you read this, and that process will probably continue for some months. Meanwhile, Aaron can't answer most of Engadget's questions because the answers don't yet exist. I give him a lot of credit for not trying to make up something to make himself sound better.

Anyway, if you see some vagueness from Microsoft and Nokia in the next few months, don't be alarmed. It's how these things are done.

When is an installed base not an installed base? I've been delighted to watch the rise of Horace Dediu, a former Nokia employee who has built himself a huge online following through very cogent analysis of Apple, and now the overall mobile market. Although I usually find myself agreeing with everything he says, I thought he was a bit off base in some recent commentary about Nokia (link).

Dediu plotted the installed base of every mobile platform, and pointed out that Symbian has a far larger installed base than any other mobile platform. He said Nokia has decided to throw away that installed base:

The disposal of such a large installed base must count among the largest divestitures in technology history and, when coupled with the adoption of the least-tested alternative as a replacement, elevates platform risk-taking to a new level. It may seem bold, but there is a fine line between courage and recklessness.

If all of those Symbian users understood that Symbian was their OS, had purchased applications for it, and felt that Symbian added value to their devices, then Nokia would indeed be taking a huge risk. But virtually the only people who were even aware of Symbian were the people reading and writing blogs about the mobile industry.

Try this -- go look at a typical Nokia Symbian phone. What is the brand you see on it? Start the software, launch some apps. Do you see the word "Symbian" displayed prominently?

Have you ever seen an ad for Symbian? A billboard perhaps, or a big glossy ad on the back cover of the Economist?

Maybe a teensy little text ad inside the Economist? Anything?

Indeed not. Because Nokia didn't want the name Symbian to be prominent. Heck, it didn't even let Symbian create its own user interface, let alone advertise its brand. Nokia made Symbian into anonymous plumbing, because Nokia wanted Nokia to be the brand that users bought. And considering how things worked out, that was something the company did right.

When I was at Palm and we surveyed mobile phone users, we asked Symbian users what OS was on their phones. Most of them had no idea. Among the minority who said they knew what their OS was, more of them thought it was Windows than knew it was Symbian.

Let me say that again, more Symbian users thought they were using Windows than knew they were using Symbian. I guarantee that hasn't changed in the years since we did our surveys.

So, if Nokia executes its marketing properly, it should be able to flip most Symbian users to Windows Phone easily. Just grin, tell them it's the cool new Nokia smartphone, and move on. In that vein, the riskiest thing Nokia has done in the past couple of weeks is play up its deal with Microsoft. It would have been better to play it down, so Nokia customers wouldn't get a message of disruption.

But I doubt most of them are listening anyway.

If there's anything reckless in the Nokia-Microsoft deal, it's the huge number of things that both companies need to execute very well in order to make it work. But I think there's nothing reckless about the basic idea of ditching Symbian.

Android apps on BlackBerry?

There have been persistent rumors that RIM is trying to get software that will let its PlayBook tablet run Android apps (link). Now there's some evidence that they may be looking to do the same on BlackBerry phones as well (link). This seems like a reasonable thing to do, but I'm astounded that they're only working on it now. The time to plan the app platform for your tablet is when you're creating the software for it, about a year before it ships. It's not the sort of thing you dink around with a couple of months before shipment. And you especially don't tell the public about it right before the hardware launches -- all that does is undercut any chance you had of getting native app development on your platform.

Wireless isn't secure (duh)

This isn't news if you've been paying attention. For years the security companies have been telling us that wireless networks (especially wifi) can easily be snooped. I'm not sure why the wireless insecurity story has never gotten much traction outside the beltway. Maybe we weren't using enough web apps to care, or maybe no one listens to the security companies because they're presumed to be alarmists who just want to charge you $49.95 a year for something that'll make your computer run slow.

Anyway, it seems to me that the story is now popping up all over the place. In December the Wall Street Journal ran a series on the information collected by mobile apps (link), this week The New York Times ran a story on the third party tools available to hack wifi hotspots (link), and a professor at Rice University posted on the types of data his class could sniff from his Android phone (link). A surprising find -- two apps unrelated to location services were broadcasting his GPS location.

Why is this significant? The mobile operators plan to offload traffic to wifi to reduce network congestion. If those networks turn out to be insecure, the operators might be blamed for security breaches that result. Or if more wifi networks are restricted due to security fears, the operators might find it harder to do that offloading in the first place. Bottom line -- it is risky to depend on someone else's infrastructure as part of your core product.

WikiLeaks: Human society as designed by an open source engineer

O'Reilly ran a fascinating review of Inside WikiLeaks, a new book describing how WikiLeaks operates (link). It reminded me of some thoughts I had after I heard a talk by Ward Cunningham, one of the creators of the wiki (link).

Most of the social structures in the world today were designed by two groups of people, religious leaders and lawyers. The religious leaders gave us governments based on moral codes and hierarchies; the lawyers gave us governments based on laws, property, and checks and balances. In both cases, the people creating the system built into it their own worldviews, their own assumptions about human nature. The assumptions were so fundamental that I think they didn't even realize they were using them; they just baked them into the system.

Wikipedia, WikiLeaks, and movements like them are profoundly new because they attempt to structure society around the social assumptions of a third group of people: engineers. And not just any engineers, but open source engineers. That culture believes in the rationality of human beings and the existence of absolute truth. It assumes that if the same information were available to everyone we'd be able to settle all disputes through logical discourse. And it is intensely hostile to authority structures, because by definition they're assumed to get in the way of free discussion.

WikiLeaks is an attempt by that culture to restructure society. I know that sounds crazy, but here's a quote from the book:

In the world we dreamed of, there would be no more bosses or hierarchies, and no one could achieve power by withholding from the others the knowledge needed to act as an equal player.

If you want to see this idea taken to its logical extreme, check out the short story "The Ungoverned" by science fiction author Vernor Vinge (it's online here). I'm not saying that's the world we're headed for, but I think we'd all be foolish to assume that WikiLeaks will be the last attempt at open source social engineering.

I think it's actually just the beginning.

The Info Pad Creeps Closer

2011-02-22T22:46:00.000-08:00

It's hard to believe that it's been four years since I first wrote about the idea of an info pad. I thought for sure we'd have one by now, but to my immense frustration it's still not here. We're gradually getting closer, though, so I think this would be a good time to revisit the idea.

As I explained in my original post on the subject (link), the info pad is a small tablet computer designed not for consuming content but for managing the information needs of a knowledge worker. It's a business tool, not an entertainment device. It has a stylus, so you can take notes and sketch on it, but it also acts as an extended memory, letting you access your old files, messages, contacts, and other important documents.

Mike Rohde drew a picture that captured the idea well (link):

For people who work with huge amounts of information, the info pad is a Holy Grail device. It's the extended memory that captures what you're doing during the day, and lets you easily recall anything you need to know, whenever you need it.

We studied the info pad idea when I worked at Palm. There was a big audience for it, very distinct from the people who buy mobile devices for entertainment or communication. Unfortunately, Palm got into financial trouble before we could do anything about it. Since then I've tried twice to pull together a startup to build one. The result was always the same: many people loved the idea (I can't tell you how many venture capitalists wanted to be beta testers). But no one wanted to fund it, because hardware startups are viewed as incredibly high risk in Silicon Valley. I was told to go to the big hardware companies and convince them to build it, but when I tried they were all focused on copying each other rather than creating anything new.

So I settled back and waited, figuring someone would eventually build it. And I waited. And waited.

I'm still waiting today.

Signs of hope

Lately we've started to see some devices that raise my hopes. The info pad isn't here yet, but I wonder if we're starting to see the first hints of it on the horizon.

The first is the Boogie Board, a tablet device that's literally a replacement for a dry-erase board. It has a touch-sensitive monochrome screen, so you can write on it with a stylus, finger, or any other object. Like a dry-erase board, you can't save pages or do much of anything else with them. So it's not even close to an info pad. But it currently sells for just $40 on Amazon, showing that basic tablet technologies can get to extremely low prices (link).

A step up from Boogie Board is NoteSlate (link). It's a tablet note-taker that works a lot like a piece of paper. Like Boogie Board, it has a monochrome screen (no grays) and you write on it with a stylus. Unlike Boogie Board, you'll supposedly be able to save pages, and share them with others via wifi. The online illustrations of the NoteSlate prototype look nice, although text on its monochrome screen looks a bit blocky (I'd be a lot happier with smaller pixels and grayscale, so you could do some subtle anti-aliasing of lines).

This closeup shows the graininess of the writing in the mockup device. The right software, and a better screen, can fix those jaggies.

The price will supposedly be $99, although that model may not include wifi. It's hard to tell exactly what NoteSlate will do because it's not shipping yet, the developer is located in the Czech Republic, and the company's website is written in broken English. Here's a sample:

Sorry if we were not able to response sooner all the great emails. When we have been preparing year ago all this, about bit weird NoteSlate device, we hoped this kind of exciting story becomes real, real product. We are going to make this thing real, also thanks to you, to produce open-source NoteSlate device and create unique NotesLate handwritten network. For 99$.

You don't have to speak good English to create a great product. But the fact that the company can't afford to get an English native speaker to edit its website implies that it has very few resources. That will make it hard to finish the product, let alone get it into retail distribution. I'm amazed that such a small, early-stage company has managed to get so much press coverage. Some websites even speculate that the product may be a hoax (link). I was able to find an interview in Czech with the product's designer, Martin Hasek, and he gives some more details on the plans. You can read Google's translation here.

NoteSlate has been nominated for an Index award, a design competition based in Denmark. The online nomination gives more details on the product (link). Reading between the lines, it looks like Martin is a designer who cooked up the NoteSlate idea. He's apparently working with Albumteam, a Czech company that sells an electronic photo viewing tablet (link). And there was a hint that the manufacturing might be done by another Czech company, Jablotron (link). At this point I'm struggling to interpret auto-translated Czech blog posts, which is not a great way to get information, but that tells you how difficult it is to find hard details on NoteSlate. (If anyone reads Czech and can give a better translation, please post a comment.)

The bottom line, I think, is that NoteSlate may be real, or may be caught in limbo. When I was trying to get the info pad idea funded, I toyed with the idea of announcing it, getting people excited, and then using the excitement to get someone to fund it. That felt too much like a pyramid scheme to me, but it's a possible approach.

High hopes for the Flyer. There are several other upcoming tablet devices that bear watching, including the mySpark education tablet (link), and the Kno dual-screen device (link). It's very hard to tell if any of these will actually ship. But the device that has me the most excited is one that I know exists: the HTC Flyer, a new Android-based tablet computer previewed earlier this month. The Flyer is a seven-inch Android tablet, very similar in looks to the tablets coming from Samsung and Motorola. But there's one crucial difference: the Flyer comes with a stylus.

That sounds like a simple change, but actually it's a profound difference. The iPad and most Android tablets can't tell the difference between a stylus and a finger. If you try to write on them with a stylus, the screen will also sense the places where your hand touches the screen, and you'll end up with multitouch confusion. HTC has paid extra for a touch sensor that can distinguish between the stylus and your hand. Touch it with the stylus and you'll get ink on screen; touch it with your fingers and you can swipe, pinch, or do anything else you'd expect from a touch tablet.

HTC has also added a note-taking application to the tablet, so you can write on the screen during a meeting and save your notes to Evernote. You can also record sound during a meeting, in a process that reminds me of the LiveScribe pen.

None of this is completely new -- Microsoft has been pushing Tablet PC systems for note-taking for the better part of a decade. But they were extremely expensive, complex, heavy, and had very short battery life. If you want an example, check out Asus' new $999 tablet PC, the EP121 (link). In contrast, the Flyer looks to be the first product that marries the good ergonomics and usability of an Android tablet with reasonable note-taking.

What's missing. Unfortunately, the Flyer has several very significant drawbacks. The first and most significant is its price. There have been several reports that the Flyer will see for about 700 euros in Europe, which is about $950 in the US (link). That's an outrageous price. When we studied the info pad idea in the US and Europe, the top price most people were willing to pay was about $499, and the demand sweet spot was $299. At $950, the Flyer is going to be compared to full-function notebook computers, and it won't come off well in those comparisons. Next to a notebook, it has very little memory, no keyboard, and few apps. The price makes it an interesting curiosity for technophiles, not a mainstream product.

Maybe HTC is hoping for a big mobile operator subsidy that will make the Flyer more affordable. Or maybe it's planning to strip out some features. The announced version of the Flyer has a 3G cellular radio built into it, which increases its cost. HTC says a WiFi version will come out later. That might cut as much as $100 from the parts cost, which could translate to a couple of hundred dollars retail. But still that would leave the device at $750, which is vastly too expensive.

I am also worried about the marketing of the Flyer. HTC is positioning it as an ideal device for gaming, browsing, productivity, communication, and just about anything else except making espresso (link). The message reminds me a lot of the old Palm LifeDrive (link), and we know how that worked out (link).

It's very easy for tech companies to fall into this sort of kitchen sink marketing, because they don't want to give up any possible customers. But the messages tend to cancel each other out -- if the device is great for gaming and music, it sounds inappropriate for business productivity, and vice versa. This also leads to bad design decisions. If you build in graphics acceleration, 3D, HDMI video, dual cameras, and a stylus, the device gets too expensive for any single use.

Would your boss reimburse you for buying this?

It doesn't help that HTC has a clear case of iPad envy. Their website even echoes some of Apple's iPad language:

Apple: "A magical and revolutionary product."
HTC: "HTC Flyer's magic pen transforms anything...Work or play, it's magic for the whole family."

The trouble is that Apple's already cornered the market on people who want a magical tablet experience. HTC needs to play counterpoint to that, not imitate it.

Where the heck is Baby Bear when we need him?

I feel like Goldilocks. Papa Bear (Tablet PC and Flyer) is too expensive and too loaded with features. Mama Bear (Boogie Board and NoteSlate) is too limited. What I want -- what's required to kick off the info pad revolution -- is a product in the middle on both price and features, optimized just for managing information. At its current price, the Flyer is destined to sell very poorly. When that happens, I hope HTC won't cancel the product. Instead, it should strip out the 3G and the entertainment features, focusing it into a business tool that could sell for less than the magic $499 price point. If Flyer doesn't survive, maybe NoteSlate or one of the other note-taking tablets will make it to market. I can always hope.

Once we get the right hardware, all we'd need would be the right software to make the info pad a reality.

We don't have the info pad yet, but we're getting closer. I am cautiously hopeful that I won't have to write this post again in another four years.

This is why it's so much fun to do business with the mobile operators

2011-02-15T15:05:00.000-08:00

"Quite frankly, we’re happy that we’re not first to market with the iPhone."--Dennis Strigl, Verizon COO, 2007 (link)

"I don't think Verizon needs the Nokia and Microsoft relationship."--Tony Melone, Verizon CEO, 2011 (link)

There's a backstory to this. Verizon sells CDMA phones, a technology which Nokia dropped years ago. Microsoft jerked Verizon around on the availability of the Kin phone last year. So Verizon doesn't love either company. On top of all that, Verizon has always been a lagging adopter of new phones. It has a reputation for doing more testing than the other operators, and doesn't mind being late on a product or technology.

Still, the quotes are very revealing of an almost subconscious arrogance that I often see in operators around the world. They view their customers as possessions who are allowed to buy only the phones that the operator chooses to offer. The operator sits in the middle and extracts money from everyone. What Melone's really saying is that Microsoft and Nokia will have to pay him a lot of money in order to have the opportunity to sell phones to Verizon customers. Never mind what the customers might want; all that matters is what the vendors do for the operator.

This is why the operators love the increasing competition between smartphone platforms. It gives them that much more leverage to play them off against each other.

Picture yourself as a smartphone company trying to deliver a great new phone to customers. What do you do about these restrictions? It puts a lot more pressure on your financials and your ability to execute -- you need to create a strong brand through heavy marketing, and create products so iconic that people will demand them.

And if you're a phone customer looking to choose whichever phone you want? The situation varies around the world. In some places, phones have to be sold separate from mobile service. That gives the greatest customer choice. In many areas, you can buy a phone and then switch SIM cards to use a different network, but you lose the operator subsidy on the phone. So it costs you hundreds of dollars to exercise freedom of choice. But Verizon doesn't even support that level of choice, so you are stuck with only the phones that Verizon allows you to buy.

The options for Verizon customers: Change operators (if you can find another one with coverage in your area). Change the law to mandate free choice of phones. Or change countries.

Impact of the Nokia-Microsoft Alliance: Welcome to the Five-Platform World

2011-02-14T00:14:00.000-08:00

Like a big collective cow, the blogosphere is continuing to chew on the Nokia-Microsoft announcement. It seems to be one of those rare events that forces people to stop, step back, and reconsider their assumptions.

I think it's impossible to say today what impact the Nokia-Microsoft alliance will have, because we don't know how well Nokia will execute. If Nokia executes poorly, there won't be any change at all -- both Microsoft and Nokia will continue to gradually decline in mobile. If Nokia executes well, I think the impact could be pretty big. Not asteroid-killing-dinosaurs big, but a very large meteorite, with effects felt worldwide.

For the purposes of this note, I'm going to assume that both Nokia and Microsoft will execute well. That's a risky assumption -- they would not have formed this alliance if they had been executing well in the past. But for today we'll give them both the benefit of the doubt.

How many platforms can we stand?

Ignore the hype from Nokia about the "third platform." The reality is that we're on track to end up with four or five significant smartphone platforms in the US and Europe: Apple, Android, RIM, Windows Phone, and HP/Palm if their new products are excellent. Japan as usual will be very different, and I don't think all five players will be equally active worldwide.

You might ask if the market can accommodate five platforms. There's a school of thought that says the smartphone market is destined to go the way of the PC market -- eventually almost everyone will coalesce on a single platform that has the most applications and licensees. If that's how smartphones are destined to work, nobody seems to have told the customers. Platforms with small numbers of apps (RIM in particular) have continued to sell well. Also, back when I was at Palm and we had far more apps than any other mobile device, it didn't let us destroy Pocket PC, or RIM, or Symbian.

I think apps do matter in smartphones, but so far they appear to matter less than they do in PCs. Without any apps, a PC is useless, whereas most smartphones ship with a lot of functions built in: voice telephony, texting, e-mail, browser, camera, etc. Third party apps are more gravy than steak, at least for now.

So maybe the magic number is two platforms. In marketing, many experts believe customers can hold only two major brands in their heads for any market: a leader and a challenger. Think Coke and Pepsi, Hertz and Avis, Airbus and Boeing. On the other hand, there are plenty of markets which have dozens of competitors. Automobiles, for instance. You can have huge numbers of successful brands there because the market is heavily segmented -- Rolls Royce doesn't compete with Mini Cooper.

I believe the number of smartphone vendors and platforms is going to depend on the actions of the smartphone companies themselves. If they treat smartphones like a single consolidated market, a shakeout is probably inevitable. If they segment the market, creating brands and devices that serve different groups of customers differently, I think there's room for all the platforms to survive.

Unfortunately, at this point most of the smartphone companies are focusing only on slavishly copying Apple. Even RIM, a company with differentiated communicator products, is trying desperately to turn them into iPhone clones. That's a great strategy to ensure commoditization and market dominance by Apple.

Since we're giving Nokia the benefit of the doubt today, let's assume they create differentiated products that help to segment the market. I think that would stimulate other handset companies to do the same thing, leading to a relatively stable multiplatform world.

Here's what that means to the rest of the industry...

For the Android licensees, there will be intense competition for shelf space

In a five platform world, I think it'll be hard for all of the Android licensees to survive. Picture your typical Verisprint store a couple of years from now (Vodorange if you're in Europe). It probably carries three iPhone devices, because Apple has diversified its line. There are a couple of RIM devices with keyboards. We're assuming Nokia and Microsoft are successful, so there are a couple of Nokia smartphones on display. Since we're giving the benefit of the doubt, we'll also assume HP has paid big comarketing dollars to get two of its devices shelved. That's nine smartphones. How much space is left for Android models? I figure maybe two or three devices, split between Samsung, HTC, Motorola, SonyEricsson, LG, etc. Life gets very uncomfortable for a couple of those companies.

Or maybe they get lucky and a RIM or HP gets knocked out of the picture. That would leave space for more Android vendors. But the Android licensees can't control that -- they're counting on Google to drive one or two of the other handset platforms out of business. Is Google prepared to fight that sort of alley knife-fight against an HP or RIM, companies that might otherwise be Google partners?

Android was a fun product for Google when all it meant was bleeding Microsoft. But it eventually made Apple into an enemy, and now Nokia. HP is next, and RIM will come after unless it licenses Android. Is that the lifestyle Google wants? I doubt it.

By the way, I think the Android shelf space problem is one of the reasons why Nokia went with Microsoft rather than Google. Nokia has more control over its fate as a Windows Phone vendor, and it knows Microsoft is willing to do anything to win.

What happens to the other Windows Phone licensees?

It's really hard for me to picture them sticking with the platform in more than a token fashion. They avoided Symbian because it was a stacked deck in Nokia's favor; I think Windows Phone now looks the same. The only way they'd invest more is if Nokia's WinPhone products started to take off strongly in a couple of years, and they were afraid of being left out. I presume that's what Microsoft is counting on (it's how they dealt with IBM in PCs).

Can HP really be the fifth platform?

HP is by far the weakest of the five mobile platforms. Although it has a great legacy, it has neglected its developers tragically and its products are late. The recent HP event shows it still has a legacy of goodwill in Silicon Valley, and you can't count out the world's largest PC company. But HP's success depends on great execution. If its products are timely and deliver on their promises, I think it has a good shot. I am especially impressed by the things HP wants to do to link its products together (another on the long list of things Microsoft fumbled years ago).

But can HP execute? It's been steering a zigzag course in PCs. For several years it invested heavily in differentiation, and hired a lot of former Apple staffers. But in the last year it laid off many of those people, killed its advertising campaign, and focused on Acer-style price competition. Now suddenly HP is talking like it wants to go back to being a differentiated premium vendor. That sort of inconsistency will be deadly when competing directly with the other smartphone platforms.

I can't figure out if the HP guys are Jedi knights or middle-aged paunchy men playing with plastic swords. Based on history, I'm about 60-40 in favor of the plastic swords.

For the mobile operators, all of this produces immense happiness

Sometimes it's better to be lucky than good, and the Nokia-Microsoft deal is a huge stroke of luck for the operators. They have always wanted the handset vendors to be barefoot and pregnant, too weak and divided to fight with them for control over phone customers. A five-platform world is immensely attractive to them because the platforms can be played off against one another. If RIM gets too uppity, you can just tip the product mix toward HP, or vice-versa.

The downside of this for the operators is that five platforms are a lot more work to support. So they'll have conflicting temptations -- carrying more platforms gives them more leverage, but adds to their costs. I think the biggest operators will choose the leverage; Verizon proved that it's not healthy to be cut off from a successful platform, and you can never tell which one is going to be successful next.

For app developers, there will be more pain

The prospect of a five platform market is a nightmare for developers. It's already hard to support two platforms (Apple and Android); the idea of supporting five is a logistical nightmare. Most developers will focus on one or two, but that limits their potential revenue because the available market is smaller.

This situation favors large established developers that can afford to do ports to all the platforms. Unfortunately, large software companies are usually the slowest to innovate, so I fear the net result of a five-platform world is likely to be less innovation in mobile apps.

There will probably be intense interest in cross-platform development environments that let a developer write once and deploy anywhere. The platform companies will resist, and probably governments will eventually get dragged into the debate as they are asked to define what constitutes restraint of trade in an online app marketplace.

The one silver lining might be if the platform vendors start to compete for developers by giving them benefits -- for example, by loosening restrictions in their app stores, and taking a smaller cut of revenue. I hope that will happen, but it's not enough to make up for the fractured development platform.

What it means to Nokia: A chance to survive

Although Europe is really a collection of nations rather than a single place, there are a few things that seem to tug on heartstrings across many European countries. The Eurovision song contest is one, Airbus is another, and Nokia is a third. It represents European style and marketing prowess, and it proves that people in Europe can lead a high-tech industry. So the deal with Microsoft represents far more than a business deal; it feels like a betrayal of a European jewel at the hands of a rapacious American company.

It's important to understand what the alternative was for Nokia. If the company had continued at current course and speed, the decline in gross margins would have put it close to breakeven this year, and it would have started losing money in 2012. Things were already so bad that restoring 10% operating profit this year would require laying off about a third of the company. Obviously the cuts won't be that severe because Elop is aiming at a multiyear recovery, but the numbers show how close Nokia was to a death spiral in which spending cuts and revenue declines start reinforcing each other.

Nokia was like a plane rapidly losing altitude. If you don't pull back on the yoke in time, there's nothing you can do to avoid hitting the ground. The company was very close to that point.

I believe Nokia's directors knew this when they hired Stephen Elop, and his charter was to restructure the company radically before the problems became unsolvable. In that sort of situation, you don't ask what products you ought to save. You figure out how much money you can spend, you make a prioritized list of everything you do, and you start cutting from the bottom of the list until your activities fit into the budget.

I think when Elop and the board did that exercise, all of Nokia's OS business was below the line. They just couldn't afford it.

Although stepping back from OS is emotionally devastating to many Nokia employees and fans, I don't think it's necessarily bad for the company. Operating systems are like plumbing; they don't actually add much value to the building, but if they're built wrong they can destroy it. Symbian advocates talked persuasively about its superior power management and ability to run on low-cost hardware, but as far as I can tell that was never reflected in higher margins for Nokia smartphones. Most Symbian users didn't even know the OS was there, and if they had they would not have paid extra for it. Symbian was enormously complex and difficult to work with, and it cost Nokia a fortune. According to Nokia's annual reports, it paid about $800 million when it bought Symbian, and it reportedly employed at least 2,500 Symbian engineers (link). Those engineers probably cost about $500m a year, or about $5 per Symbian phone sold.

Nokia went into the OS business because it was afraid of depending on someone else's plumbing. Now it's betting that Microsoft is weakened enough that it'll actually cooperate with Nokia. Microsoft will reportedly end up paying Nokia more than a billion dollars to adopt Windows Phone (link), and Nokia can reassign the Symbian engineers to tasks that will actually differentiate Nokia's products. The deal with Microsoft could end up being not a surrender for Nokia, but a liberation.

But as I've said before, it all depends on execution. For the folks inside Nokia, things will feel worse before they feel better. The layoffs are still to come, and until then it will be hard for employees to focus on their jobs. Even after the layoffs are done, it will be a lot of months before Nokia can ship new devices designed to take advantage of Windows Phone. Until then, Nokia is unlikely to reverse its gradual loss of share in smartphones.

When I first held a Nokia n97, I was lost in admiration at how beautifully the hardware was put together. Everything from the shape of the case to the motion of the sliding hinge screamed elegance. Then I tried the software and I wanted to toss it out a window. Nokia's smartphone task is now very simple: produce some great devices like the n97, marry them cleanly with Windows Phone, and partner with Microsoft to get them distributed as broadly as possible.

If Nokia targets those products at real customer needs, and differentiates them from the iPhone rather than just trying to top it, it has a good chance of creating the multi-platform future it's talking about.

It's not as much fun as conquering the entire tech industry, but it's a lot better than going broke. And it's probably the only choice Nokia had.

Nokia: Now Comes the Hard Part

2011-02-11T02:12:00.000-08:00

Wow, what a week!

Before I get to all of the happenings in tech, I want to acknowledge that the real news this week is coming out of Egypt. Nothing happening in our industry is significant compared to that. All I can say is that I hope the people of Egypt get the government they want, without bloodshed.

While the fates of nations get played out on the world stage, the tech industry has been having its own little revolutions via press release. The big news at the start of the week was that the world's largest PC company, HP, said it's going to make its own PC operating system. That's stunning, and deserves a lot more discussion than it's gotten so far. The relatively light coverage was driven by HP's decision to bury the announcement at the end of a two-hour device preview. It's a huge change, a massive threat to Microsoft, and if HP can execute it will affect every other tech company.

Of course, the phrase "if HP can execute" is a very big if.

Then just this morning, Nokia and Microsoft announced a sweeping, broadly-worded alliance in which Nokia joins the Windows Phone ecosystem. I think Nokia wants to be to Windows Phone what IBM was to MS-DOS in the early years: the lead licensee that makes it a standard and dominates hardware sales. Presumably Nokia has a plan to make sure it doesn't end up roadkill the way IBM did.

The announcement is very vague, and describes a "proposed" partnership. In other words, the executives have decided to work together, but the details are not yet settled. That's typical for huge alliances like this; the CEOs sit down and trade business elements back and forth like poker chips. After the announcement, their managers get to work out the details of what the alliance really means. Some of the expected areas of alignment won't work out, and some other things will be added. So we should expect the Microsoft-Nokia alliance to evolve over the next few months. But the intent seems pretty clear, and it's about as sweeping as it could be short of merging the two companies.

Key points in the announcement:

--Nokia adopts Windows Phone as its smartphone OS. I think the implication is that Symbian and MeeGo both move to the back burner with lower levels of investment. As far as I can tell, Nokia is gradually getting out of the OS business.

--Nokia will participate in the development of Windows Phone. The details of what Nokia would do here are unclear, and my guess is they haven't been fully defined yet.

--Microsoft and Nokia will coordinate the marketing and road map for Windows Phone.

--Bing is now Nokia's search engine, and Microsoft adCenter is Nokia's advertising service.

--Nokia Maps gets used by Microsoft (details unclear).

--Nokia's content and app store will be merged with Microsoft Marketplace. Is this a way of saying Ovi merges with Marketplace? I bet that hasn't been worked out.

--Nokia has split its Devices organization into a Smartphones business (Symbian, MeeGo, and Windows Phone) and a Mobile Phones business that drives low-cost feature phones. It's not clear what the OS will be at the low end. This is the third org structure for Nokia's phone business in the last four years.

This thing is like a Homeric saga. Thirteen years ago, Nokia championed the Symbian initiative in order to keep Microsoft out of mobile phones. Meanwhile, Microsoft embraced the Chinese mobile phone companies in order to drive Nokia into the sea. Instead, both companies got battered by Google and Apple. Now much humbler and weaker, they have decided to work together.

Unanswered questions

There are going to be a lot of these, but the two that I'm most anxious to hear Stephen Elop address are:

What happens to Qt? I couldn't find any mention of it in the Nokia press releases.

Does Nokia have IP ownership over the features it codevelops with Microsoft? If not, how does Nokia avoid being commoditized by Windows Phone clones?

Will it work?

That's the other big question, and no one can answer it right now. I've lived through some whopping corporate alliances over the years, and they often fail. Reading through the Microsoft-Nokia press release gave me flashbacks of the IBM-Apple deal that produced Taligent. The wording, the vagueness of the details, and the miasma of mild desperation clinging to both partners is very familiar.

(If you don't remember Taligent, it was a visionary joint venture by Apple and IBM in the 1990s to create a new PC operating system. It consumed huge amounts of money and talent from both companies, and produced nothing of value.)

The difference is that neither Apple nor IBM had to make Taligent work. It was not central to the future of either company. By contrast, if Nokia really does ramp down development of Symbian and MeeGo, it will have no choice but to make Windows Phone work. Microsoft is in a little less of an existential crisis, but with HP moving away, it really needs a big win somewhere, and as far as I can tell Nokia is its only shot at renewed relevance.

For Nokia, the upside of this deal will come from redirecting its resources. Instead of spending a huge amount of time and money creating OS plumbing that customers can't see and don't value, Nokia should be able to put a lot more effort into creating apps and devices and middleware that delight customers. This could be an incredibly liberating experience for Nokia, triggering a renaissance in its innovation. But it won't happen unless Nokia makes the alliance work. Execution is everything.

The next year will be painful and humbling for Nokia. The company dreamed of ruling the entire tech world, and Stephen Elop is killing that dream. Many Nokia fans online had bought into the dream, and we're going to hear screaming from them. To make matters more difficult, all of the pain will happen up front, as projects are canceled and people get laid off. The benefits won't be visible until the new products ship, and phone development takes a very long time.

In a comment on my post about Nokia earlier this week, Doug Turner pointed to the "Finnish consensus culture" as part of Nokia's problem (link). I agree about the problem, but I think that culture could be turned to an advantage. When there is a consensus, Nokia can move quickly and firmly. So a key to success for the new strategy is creating an internal consensus at Nokia on the need to let go of the OS, and to adopt some different business processes in the smartphone team, in particular the institution of the dictatorial product manager.

These will be hard ideas for Nokia to absorb, but there are precedents. When I was at Apple, it had an incredibly dysfunctional culture that you can probably say was based in Californian cultural values of independent thinking and conflict avoidance. The result was passive resistance so severe that the company was almost unmanageable. Back in my pre-blogging days, I wrote about it in an essay called "Who Killed Apple Computer?" (link) I took a lot of grief from some of my former colleagues over that article, and I am delighted that Apple bounced back from its near-death experience far more vigorously than I thought possible at the time. But it happened only because Steve Jobs made a massive change in Apple's culture and operating practices.

The change at Apple was far bigger than what Nokia needs to do, in my opinion. If Nokia's employees are willing to change, I think it can bounce back too.

But I can't tell yet if the willingness is there. Some of the comments I've seen online from former Nokia employees are jubilant. Here's Julien Fourgeaud, a former Nokia design engineer, on the Elop "burning platform" essay: "It is a brilliant piece of communication, providing a clear description of the situation, and a clear corporate message" (link). But then there's Tomi Ahonen, a former Nokia employee and mobile industry consultant. Tomi has always been my touchstone for Nokia's culture. Reading his weblog feels almost exactly like doing a meeting with Nokia, circa 2007. Tomi's reaction to the Elop memo was total denial. He didn't just disagree with the memo's points, he believed it was a forgery. In a very methodical, logical essay (link), Tomi said the memo sounded like the work of an ill-informed American analyst, and contained omissions and factual errors that no Nokia CEO would make. "No way would Nokia's CEO be so deluded from the facts," he wrote.

I had a different take. The memo sounds like something I'd expect to see from a very busy Silicon Valley CEO who knows in his gut what needs to happen, is trying to explain it to his team, and is a little bewildered that the employees can't see what he sees. Elop's point wasn't the precise details he cited, it was how they all added up. A computer platform is all about momentum. If you're gaining partners and developers and customers, you are on track for success. If you're losing supporters, you are in trouble -- no matter what other evidence you have.

In mathematical terms, you manage to the second derivative -- the rate and direction of change, not the raw numbers themselves.

Nokia's second derivative sucks. You don't need a long analysis to understand that, you just need to look at gross margin. As I said in my note on RIM last fall (link), the leading indicator of decline in a computing platform is erosion in gross margins, because that means you're consuming late adopters and you'll eventually run out of them. Let's look at the gross margins of Nokia's Devices & Services business:

Forget about the big S60 installed base, forget about how cool Ovi is, forget what Symbian did in Japan. History shows that if you wait for all of the indicators to turn red it'll be too late to save the company. Nokia's mobile phone gross margins have been declining for three years, at an accelerating rate. That alone is enough to justify everything Elop said, in my opinion. It would be blindingly obvious to any exec who knows platforms.

A disconnect between Elop's concerns and Nokia's understanding of them would be a mortal danger to Nokia. If that disconnect exists (and I can't judge that from the outside), it needs to be addressed immediately. The only way to fix a communication problem like this is through exhaustive two-way outreach; both parties need to take ownership of the problem.

For Nokia's employees, that means you need to recognize that your new leadership comes from a business culture that sometimes values vision and gut instinct over detailed analysis. The assumption in the computer industry is that things change so quickly that if you wait for a full analysis you'll fail for sure, so you might as well trust your instincts and experience. This sort of decision-making is going to seem reckless and irresponsible to data-driven Nokia, but if you want to be a player in computing you have to get used to it. Listen supportively, ask clarifying questions (as opposed to challenging ones), and comply energetically with what you're told to do even if you don't completely buy into it.

And by the way, if you find that you can't get energetic about the new direction, you need to turn in your badge. If you can't put in your best effort, you'll drag down the energy of the people around you.

For Nokia's new leaders, that means you need to explain in great detail the problems you see and exactly what you expect employees to do. Keep in mind that you're asking them to do things that aren't instinctive to them, and that may go against long habits. Even if they are eager to carry out your plans, they may need a lot of handholding before they have an intuitive understanding of what to do. When they ask rudimentary questions even after you've explained the new strategy three times, you may feel like they're challenging you. Maybe they are, but more likely you just haven't been specific enough. Be patient, try again, and give lots of details on what to do. Don't assume that anything is intuitively obvious.

The alternative to this sort of active outreach is gridlock, which really would doom Nokia. I've seen that happen at other companies, where the CEO and the mass of employees settle into opposing camps, with the CEO grumbling that employees are resistant to change and the employees grumbling that the CEO is "a delusional psycopath (sic) who willingly suspends reality," as Tomi wrote. Once that mindset sinks into a company, it's almost impossible to eradicate.

(My former colleague Nilofer Merchant wrote a whole book on this subject, The New How.)

So the hard work for Stephen Elop and his team is just beginning. Identifying a strategy is relatively simple. The real test of Nokia will be its ability to rally around that strategy and implement it. I'd be surprised if it's not a bumpy process, including the firing of senior managers who don't buy into Elop's view, and a lot of heartache as treasured initiatives are tossed out because the company simply can't afford to do everything it wants to do.

When Steve Jobs returned to Apple, he asked for 100 days to plan significant changes in the company. Nokia's a lot bigger than Apple was at the time, and the challenges are different, so I suggest a longer timeline. I think Nokia probably needs four months just to get the organization aligned, and it takes 18 months to get new products to market. So by the August break, Nokia needs to be settled into its new structure with a good plan for executing on the strategy. And then if everything works well, I hope we'll see some very interesting new products from Nokia in Christmas 2012.

Nokia: An Excess of Cleverness

2011-02-09T21:00:00.000-08:00

I'm looking forward eagerly to Nokia's strategy announcement this week. Although Nokia is not highly esteemed in the US, most of the rest of the world recognizes it as an enormously important company: a brilliant manufacturer, a symbol of status and affluence in the developing world, and a source of great pride to its many fans in Europe and elsewhere. If Nokia could combine its strengths with better execution in software and smartphones, it could be a formidable force in the computing industry as a whole, not just in mobile.

In anticipation of the new strategy, I wanted to share a few thoughts on why Nokia has struggled with the intersection of phones and computing, and what it might do to fix the problems.

A couple of disclosures first:
--Several years ago I did a consulting project for Nokia. I've also met with them, I have had a lot of briefings from them, and I know several people who work there. No inside information from any of those sources has gone into this note.
--Before someone posts a comment saying so, yes my views are colored by the place I live, Silicon Valley. Your paradigm may vary.

As is often the case for big successful companies, I think Nokia's strengths are also its weaknesses:

Strength 1: Nokia focuses very well...which can lead to denial of reality

Nokia has a very intense, delivery-focused culture that has enabled it to pursue strategies with awesome focus and determination. Over the years, the company has transformed itself from a paper mill to a rubber boots company to a video monitor company, etc, etc. I can think of very few modern firms that are capable of that sort of huge transformation.

But I think that same determination has also sometimes enabled Nokia to live in denial of reality. As an outsider who has dealt with Nokia a lot over the years, the company often comes across to me as the opposite of a learning organization. Rather than getting inquiry and questions, when you discuss an issue with Nokia you tend to find that there is already an official Nokia answer to it: self-assured, hermetically sealed, and often sounding slightly condescending.

When Nokia was on a roll and executing beautifully, that self-assurance was entirely justified. As somebody once said, "it's not arrogance if you can do it." But as the company faltered, I think its belief in its own specialness and power led it to resist making changes that would have happened at most other companies several years ago. This deepened Nokia's problems.

A quick look at the company's financials tells the story. In 2006, Nokia was on a roll. Its revenue was growing nicely, and it had operating profits of about 12% before taxes. But starting in 2007, Nokia hit a wall. Its revenue flattened and then fell. Despite the revenue problem, Nokia held its R&D, marketing, and administrative spending almost steady in Euro terms, increasing them as a percent of revenue. It's as if Nokia believed four years of revenue stagnation were just a temporary glitch to be endured rather than a fundamental problem that had to be fixed.

(Note: Fiscal years, all figures in $millions. The numbers above and below were restated from euros to dollars. I also excluded miscellaneous revenue and expenses, and one-time charges, because they distort the trends.)

To give you an idea of the impact of Nokia's slowdown, here are a couple of comparisons to Apple.

First, revenue...

Yes, Apple is now a bigger company than Nokia in terms of revenue. That alone is pretty astonishing to me, and I'm sure it irritates the folks at Nokia, since they routinely bristle at this sort of comparison (link).

Here are expenses (R&D, marketing, and administration) as a percent of revenue. Lower is better.

Apple has done a nice job of holding its expense growth below its revenue growth.

And here's the payoff: Operating income

Financially, Apple has just plain run away from Nokia.

When Stephen Elop was announced as CEO of Nokia, people made a lot of hay about his background as a Canadian. I think that was the wrong bit to focus on. To me, the most important element of Elop's background was the ten years he spent in Silicon Valley. I wondered what a Silicon Valley guy would think when coming into a company and seeing financials like these. I believe the reaction would be horror: "Why didn't you people panic back in 2008?" The accepted wisdom here is that you just don't let expenses stay high through four years of declining revenue. That lets the problems fester. Nokia is now a bit like a patient who has delayed routine medical treatment for so long that he ends up in the emergency room needing surgery.

Elop's now-famous memo on Nokia's problems speaks volumes about the company's culture (link). Assuming the memo is real (I am taking the word of the press on this), Elop likens Nokia's situation to jumping from a burning oil derrick into the North Sea -- where, as anyone in the Nordic countries would know, you can die of hypothermia in minutes.

What does it say about the employees' resistance to change that the CEO feels he has to be this alarming?

Strength 2: Nokia manufactures wonderfully...which produces sterile, inartistic smartphones

Nokia is one of the most efficient manufacturing companies on the planet. Very few western companies have ever withstood an all-out assault by China Inc, but Nokia, a company from high-cost Finland, has also been for years the world's lowest-cost major producer of phones. Elop's memo says that cost leadership is now under threat, but still it's an unbelievable accomplishment that ought to be studied in every business school worldwide.

But the same manufacturing-driven culture that turns out great, cheap feature phones by the dozen breaks down when asked to craft an intricate smartphone in which overall system integration is the most important feature. Nokia designs phones using a manufacturing-like process in which different groups create features in parallel. So (to make up an example) one group might do the user interface, another the mail app, and another the browser. That's very efficient for creating lots of phones quickly, but it means it's very difficult to integrate all of the pieces together closely so they produce a great user experience. The best smartphones, like the iPhone, are designed holistically, with all of the pieces coordinated together. A product manager controls the process and can enforce compliance with the product vision. This process is much slower and less efficient than Nokia's, but when you're creating a product with a lot of software, it ensures that everything works together well.

Apple can get away with this less efficient process because it produces one phone at a time. Nokia has 89 different phone models available currently in Europe (link).

Strength 3: Nokia makes fantastic plans...over and over and over again

Nokia has for decades been able to hire the brightest people from a very bright country, Finland. After meeting a lot of Nokia employees, I can tell you that it probably has one of the smartest workforces anywhere. But all that intelligence has produced an analytical culture that breeds complicated plans elaborately fleshed out by committees. Its history in the last decade is a series of wickedly clever, logical strategies that were so complex and took so long to develop and implement that they were often obsolete before they came to fruition. It sometimes seems as if Nokia has been crippled by an excess of cleverness.

I'm reminded of a short story by science fiction legend Arthur C. Clarke, Superiority. In it he described a society that lost a war by continually focusing on the new weapons that were about to come out of the labs, rather than mass-producing the ones that it already knew how to build.

To make matters more difficult, Nokia defined almost every major company in computing and telecommunications as its enemy. At one time or another it has decided that it needed to dominate or defeat Microsoft, Apple, RIM, Google, the entire handset industry, the network equipment suppliers, and of course the mobile operators. Even the US government tries to fight only two wars at once; Nokia has been fighting at least five.

There are so many examples of Nokia's busted plans that I don't know where to start. The Symbian adventure, in all of its permutations, is an obvious one. Nokia has gone through a number of different organizational structures, each of which was supposed to optimize it to compete in the new world of computing and internet. But the one that sticks out at the moment is Nokia's venture in tablet computing.

Don't get me wrong, I do know the differences between an iPad and an n900. They are dramatically different devices that reflect profoundly different design philosophies. But both were designed for a similar high-level goal -- to make computing and web access mobile. Nokia shipped its product first, more than three years ago. Apple shipped last year. Apple is selling seven million units a quarter, while n900 sales are what, a few hundred thousand? Nice, but not a new industry. I know Nokia has learned a lot, and has built a lot of infrastructure, but at some point you have to generate revenue rather than just having a great learning experience.

What do you do, Mr. Elop?

I think the biggest challenge facing Stephen Elop is that he needs to preserve the strengths of Nokia even as he undoes their effects. Expenses have to come down, but at the same time he needs to invest in innovation. The company must keep its manufacturing strength, even as it adopts a design philosophy that undercuts manufacturing efficiency. People at Nokia have to be free to innovate independently, but when left to itself the Nokia culture tends to seek consensus and compromise.

I suspect that given all these changes, even motivating the Nokia workforce may become a challenge. The Nokia people I've talked to love the company and desperately want it to get better. But nobody could live through the last few years without getting a bit burned out. Now the CEO says your home is on fire and you need to jump into freezing water. Would that memo motivate you to work harder, or would it motivate you to work on your resume? I was discussing the memo with several of my old friends from Apple today, and one of them joked that the message to employees was, "Everybody come to the communication meeting Friday! Oh, and you might want to pack up your personal belongings and bring them, just in case." On Friday, Nokia's people will need to see a carrot -- an attractive, plausible vision for the future of the company -- rather than just a stick.

I'll be watching carefully for that vision. We're hearing rumors that Nokia is planning to shift away from its current operating systems and build on top of Windows Phone 7. I doubt that's the full story. For one thing, Nokia can't completely cut off its current software and switch to something else; there would have to be a long transition. Besides, in the Nokia earnings call last month, Elop dropped some hints about his plans. He talked about maintaining two platforms, one aimed at the mass market and another at the high end. He said Nokia's biggest challenge is at the high end, so that's where I would expect a change is most likely. Elop also went out of his way to praise the QT software layer, so I would be very surprised if it's killed. If Windows Phone is in Nokia's future, I think we'd see it at the high end, paired with QT. So we'd get a hybrid OS with Microsoft's plumbing and Nokia APIs.

That would be a bold move, but it's also extremely complicated. I remember when Palm tried to build its future on Windows Mobile, and gave up in disgust a couple of years later when Microsoft licensed Palm's innovations to other phone companies. How would Nokia restrain Microsoft from doing the same thing again? Elop worked at Microsoft, so I'm sure he has some ideas.

Overall, it sounds like a high risk strategy, almost wickedly clever. Exciting stuff. And yet I keep remembering how Nokia's other wickedly clever strategies have worked out.

Note: I've added more commentary on the Nokia announcement here.

Quick Thoughts on the HP Announcement

2011-02-09T12:31:00.000-08:00

I like the products, I don't like the event.

What's impressive

I like the devices. I am disappointed that the tablet doesn't have a stylus, but HP is clearly going for the media player space, and it's a worthy competitor there. The Android tablets and PlayBook start to look kind of weak in comparison.

I like the idea of a smaller smartphone. It's something Apple should have done with iPhone. (It did the same thing very successfully with iPod; why not iPhone?)

I like the integration between the phones and tablets. That's a smart move. The more HP can make this a competition of product families, the more of a disadvantage the Android cloners will be at.

I like the apparent attention to detail in all of the products. As you'd expect from a team headed by a former Apple guy, HP/Palm understands hardware-software integration and how to make a product feel good to use. Even if you never buy one of the HP products, you'll benefit from what it's doing because HP is challenging everyone else in the industry to step up their design and integration skills. Samsung and Lenovo, take note.

And I love the idea of putting this same OS on personal computers. It's bold, it's scary, it's...uh, it makes HP look a lot like Apple. Maybe instead of "Think Beyond" they should have called the event "Think Similar."

And how ironic that HP is moving toward having its own OS just as Nokia is moving toward (reportedly) running someone else's.

What's not impressive

I disagree strongly with the timing and content of the announcement. I am not talking about the length of it. Yeah, they went too long, but it's not a big deal in the ultimate scheme of things. I think there's a much deeper problem here. Good marketing is like a fan dance -- you don't reveal as much as people think you do, and you always leave them wanting a bit more. HP built up the expectation that its new products would be available immediately, and then announced stuff that will ship sometime in summer, if not later. We don't even know prices yet. This gives competitors a huge amount of time to react, and more importantly the products themselves are going to seem old by the time they ship.

This isn't a fatal mistake, but I think it would have been far more effective if HP had discussed the products only in a "secret" event for developers. The news still would have leaked, but rather than being disappointed we would have been tantalized and eager to hear more in the months to come.

HP may be developing products more like Apple, but it's still marketing like HP.

Fearless Predictions for 2011

2011-01-02T20:53:00.000-08:00

"A man who goes around with a prophecy-gun ought never to get discouraged: if he will keep up his heart and fire at everything he sees, he is bound to hit something by and by." --Mark Twain

It's that time of the year when journalists, analysts, and bloggers fire their prophecy guns, predicting what will happen in the next 12 months. Most year-end predictions fall into four categories of uselessness: Fish in the Barrel, Shots in the Dark, Wish-Fulfillment, and Self-Service.

Fish in the Barrel are predictions so obvious that they're almost sure to come true. You make this sort of prediction if you're afraid someone will come back in 12 months and point out how many things you missed. Any good prediction list should include about 60% fish, to ensure a nice overall score. For example, the San Jose Mercury News recently predicted that M&A activity will increase in cloud computing in 2011 (link). Gosh, really?

In this spirit, I'd like to predict that water will flow downhill throughout the year. Please keep track of that; I know I will.

Shots in the Dark are things that no one can really predict, but that involve prominent names, so they sound insightful and interesting. You need about 20% of this sort of prediction on your list -- not enough to ruin your average, but enough so you'll sound bold. Besides, if you get lucky and hit on one of these, you can claim credit for the rest of your career. The Merc predicted that Google will buy Twitter this year. Nice.

My shot in the dark is the Newt Gingrich will marry Lindsay Lohan in 2011. I know it's a stretch, but if I'm wrong I can pass it off as a joke, and if I'm right I'll be famous forever.

Wish fulfillment. This is the other 20% of a good prediction list: You should predict one or two things that everyone agrees ought to happen, even if it they aren't likely to actually come true. You don't get blamed if these are wrong, because the failure of the prediction shows that there's something wrong with reality, not wrong with you. The Merc's prediction that Carol Bartz will be fired from Yahoo in 2011 fits in this category.

My wish fulfillment prediction for 2011 is that mobile web apps will take over from native mobile apps. I've been predicting that for years (link); if I keep doing it long enough I'll eventually be right. But in reality I think it won't happen in 2011, because APIs and browser infrastructure for disconnected web apps aren't fully mature yet. Maybe 2012...

Self-Service. These predictions are a whole separate activity. Many industry publications fill valuable column-inches, and reward advertisers, by asking industry CEOs to predict the next year. Most of the CEOs have no idea what to say, so they pass off the task to their PR departments, who naturally predict that the most important event of the next year will be the total dominance of their employer. That's how Wireless Week came up with the following stunning forecasts (link):

--A mobile operator predicts that this will be the year of 4G
--A mobile transactions company predicts that it'll be the year of mobile payments
--A networking equipment company predicts that it'll be the year of WiFi

And on and on. Along these lines, I'd like to predict that 2011 is the year that my startup, Cera Technology, will take over the galaxy.

(By the way, it really will.)

The trouble with all of these sorts of predictions is that you can't do much with them. They're fun to read (and that's probably their main point), but if you take action based on them you'll put your business at risk. Even the fish in a barrel are riskier than they look, because they're built on straight-line predictions of current events, and the past is a poor predictor of the future. For example, here's ReadWriteWeb in 2007 on a thing called SecondLife (link):

SecondLife will become an important platform for marketing, promotion, and of course social networking - as people and businesses figure out different uses for it. Also we think SecondLife will continue its expansion worldwide. Currently you can find Habbo and SecondLife cards in most supermarkets (Wallgreens, CVS) in the US, so this trend should continue in other parts of the world. In short, virtual worlds will become an integral part of the real world in 2007.

Ooookay.

I am not trying to pick on ReadWriteWeb; it's an excellent site, and there were huge numbers of predictions like this at the time. But you get my point.

Since it's impossible to accurately predict the future, the forecast I'd like to see isn't a list of what will happen, but a list of what could happen. And I'm not looking for small things, but the big surprise changes that make or break companies and industries. Specifically, what assumptions are we making that could turn out to be wrong? How would that change the balance of power in the market? And what should we do about it?

Here are my four forecasts of possible game-changers in 2011:

1. The Mobile Data Market Stops Growing

That's a prediction you won't see in many places, but think about it for a minute. Every market eventually saturates. The question isn't whether mobile data will saturate, but when.

Right now everyone's assuming the saturation point is far away, because smartphones are owned by only at most a third of phone users in the US and Europe (link). The other two thirds are still available! I have no doubt that most of those people will eventually get smartphones as their prices drop. Horace Dediu has made this case very persuasively (link).

What I'm not sure of, though, is that those people getting cheap smartphones will pay for data plans.

When I was at Palm, we studied the market for mobile devices very intensely. At the time, about a third of mobile phone users were willing to pay extra for any sort of advanced feature. The other two thirds weren't willing to pay anything extra. Many of them were too poor, some of them were too cheap, and some of them just didn't see any value in it.

If you gave them free hardware, like a cameraphone, they'd take it of course. But when it came time to pay for camera-related services, they took one look at the first month's bill and then stopped sending photos to each other. That's why multimedia messaging was a business failure.

Things have changed since I left Palm. Smartphones are a lot more capable than they were four years ago, the networks are better, and Apple has spent years advertising the benefits of an iPhone. I'm sure that has increased the number of people willing to pay extra for mobile data. But by how much?

No one I know of has studied this directly, but I did recently see some consumer research from one of the major analysis firms. It suggested that the percent of people willing to pay extra has risen to about 40%. If that's true, then rather than being a third penetrated, the mobile data market may be about 75% penetrated. Given the rapid growth of smartphone sales, we could hit the demand wall as soon as late 2011.

I'd be delighted to be wrong in this forecast. Maybe the willing customers are growing much faster than the studies indicate. Maybe the new devices coming this year will suck in a bunch more people. I hope so. But if you think 100% of the population is going to willingly add $200 or more a year to their phone bills just to browse the web from a bus, you're living in fantasyland. And the end may be a lot closer than you think.

What it means. The major mobile companies should be conducting careful consumer research on the willingness of people to pay for data plans. Match that up with the growth rate of smartphones, and see where the lines cross. Then invest (or hide) appropriately.

2. Facebook Becomes Passé

No, Facebook won't die in 2011; I'm sure it will continue to grow throughout the year. But right now Facebook is seen as the hottest player in the Internet, the leading disruptor that forces everyone else to react to it (link, link).

By contrast Google, the previous lead disruptor, is looking more and more like a typical big company trying to hit its growth targets. The most striking evidence for this has been Google's public switch from internally-generated innovation to acquisitions. At the peak of Google's rise, analysts fawned over its plan to innovate internally by hiring bright people and turning them loose on problems. An article in Fortune Magazine in 2006, Chaos by Design, said Google had figured out how to create an internal atmosphere of "structured chaos" in which new ideas would bubble to the top automatically (link). Four years later, Google's VP of corporate development says acquired companies can move faster than Google itself can (link).

"The stunning success of acquisitions that led to products like Google Maps, Android and YouTube has also opened Google to criticism that the company has become Silicon Valley's answer to the New York Yankees, using its wad of cash to buy talent rather than developing it from within." --San Jose Mercury News

It's not a shocking change. Tech Overlords don't last forever, and in fact it seems like their reigns have become shorter over time. IBM was the dominant player for about 25 years, Microsoft for maybe 15, and Google has held that role for less than ten.

If Facebook is the new leader in disruption, what could knock it off the throne? I think its own success may carry the seeds. As Facebook has become more and more popular, the young people who first fueled its success have started to look elsewhere for their social connections. I've been watching the online habits of my teenage daughter and her friends. They use Facebook, of course, but it's just one in a constellation of social tools they use, and it's not at the center.

The hot property among the people I watch appears to be Tumblr, which is a combination of social network and blogging platform. Unlike Facebook, which focuses on your connections, Tumblr focuses on shared self-expression. It's a new social medium, the easiest place online to say "I love these shoes" or "here's how I feel" or "listen to this song that my friend just posted." For users who want to communicate feelings more than ideas, Tumblr is a unique vehicle. No wonder it's popular among teens, who by definition are sorting out their feelings.

The other thing that makes Tumblr different is that it's not overrun by 40-year-olds reconnecting with their high school classmates.

This is a very typical Tumblr page (link).

Here's a Tumblr user on the difference between Tumblr and Facebook, expressed through video clips, which is very typical of the way Tumblr users communicate: link.

I'm not saying that Tumblr is the next Facebook. Right now Facebook has about 30 times more traffic in the US; comparing them is like comparing a ladybug to a wolverine. For all I know, in another six months the kids may have moved on to something else. But the lesson of Tumblr is that Facebook encodes one particular type of social interaction, the friends-list-with-status-updates. The real world of social interaction is far, far richer than that, and we don't know how it will translate online. Chances are that at some point Facebook's powerful paradigm will turn into a straitjacket.

Will that happen in 2011? I have no clue. But I bet it'll take a lot less than a decade.

What it means. Rather than trying to compete with Facebook head on, I'd be looking at other paradigms for social interaction online. What social needs do people have? Approval? Validation? Stimulation? How can you deliver those things online, more effectively than people can get them in person?

3. Book Publishing Dies

Someday, ebooks will enable established authors to sell their writing directly to the public, bypassing the publishers and bookstores and taking 70-80% of the revenue for themselves, rather than giving 85% of it to middlemen. I have no doubt whatsoever that this will happen. The trick is figuring out when. People have been predicting it for more than a decade, but so far the publishers are still in charge.

As you know if you've been reading this blog for a while, I've tried to do some economic analysis on when we'll reach the tipping point where publishers become redundant (link). I won't repeat the whole analysis here, but the summary is that when about 20% of the book-buying public has ebook readers or tablets, it'll make economic sense for an established author to drop print entirely and go straight to electronic distribution (because they can make so much more per copy sold electronically). We're likely to see slow progress for ebooks until that point, and then an accelerating stampede after.

We're not close to the 20% tablet penetration figure yet, and we won't hit it in 2011. But 20% is just an average across all authors; some may find that the market has shifted for them earlier than others.

So I was fascinated when I ran across this LA Times article on authors who have already decided to start ditching their publishers (link). These aren't vanity writers going electronic because they can't get into print; they're established authors who are pulling their backlist books out of print because they can make more money selling them electronically. One of the authors, Joe Konrath, detailed the economics of his decision here.

Check out the Times article and Konrath's scenario on the potential death spiral for bookstores (link). The rumbling sound you'll hear is the Four Horsemen riding after the book publishing industry. Will they arrive in 2011? Not for all publishers, and not all at once. My guess is that we'll continue to hear more hype than action in 2011, with the big switch starting in 2012 or 2013. But the situation is fragile, and today's migration could turn into a stampede sooner than I expect.

What it means. As I've said before, publishers need to find a way to deliver real value to authors and readers in an electronic world. Maybe it's editing services, maybe it's marketing, maybe it's something I can't think of. But it's different from what most of them do today. And no, helping an author navigate the variety of ebook stores is not the answer. An agent can do that.

4. The Year of the Tablet Backlash

I'm sure Apple is going to sell a lot of iPads, Amazon (and maybe B&N) will sell a lot of e-readers, and hopefully the HP/Palm tablet will be interesting. But I think it's very likely that most of the other tablets entering the market this year will exit just as quickly. Why? Because there's no particular user problem they're solving.

I've seen these consumer electronics bubbles before. One company has a successful product, somebody else copies it ineptly, and everyone else piles on because they don't want to be left behind. Never mind that they don't know why they're building the products, or for whom. The result is inevitably a big overshoot, inventory writeoffs, damaged careers, and a press backlash as the manufacturers run away from the market and customers feel burned.

This is another case where I'd be very happy to be wrong, but the situation smells very much like the other product bubbles I've lived through. If the tablet market does take off, it'll probably be because the manufacturers were rescued by an unexpected killer app. If things end badly, give some blame to Google for feeding the overshoot by pushing Android as a tablet OS even though they have no clear idea what the market is for it. Credibility is a precious resource, hard to accumulate and easy to squander. When you have a powerful brand, you can convince people to follow you up the hill on a crusade once, or maybe twice. But after you've burned them enough, they won't follow you readily again. Just ask Microsoft.

What it means. If you're making a tablet app, don't depend exclusively on Android. And if you're creating tablet hardware, the product you should be building is an info pad (link).

There you are, my four forecasts of big game-changers that could happen in 2011. What do you think? You're welcome to disagree with these, but I'm most interested in your predictions of other big, surprising changes that could happen in the next 12 months.

RIM's Q3 Financials: A Tale of Two BlackBerries

2010-12-21T18:54:00.000-08:00

People have been asking for my take on RIM's latest quarterly earnings, which were reported last week (link). The short answer is that I am both less worried and more worried than I was before. I am less worried because the company has more strength than I realized internationally, and I am more worried because the situation in North America is worse than I thought.

Before I get into my comments, I should point out that I don't think you can use a single quarter to declare a company either dead or saved, especially when it's as big and prominent as RIM. In the last couple of years, attitudes toward RIM have gone through a couple of cycles in which negative coverage about the company builds up, the company has a good quarter, and the coverage dies down for a while again. I think it's more useful to look beyond the individual quarters and try to see the long term trends.

In that spirit, I think RIM's earnings were good, but I was more interested in the things management said about moving toward new products and services, and by the very rapid changes happening in RIM's international sales. Overall, I wouldn't say the company is out of the woods at all, and 2011 will be a decisive test of its viability. Here's an overview of the earnings, followed by some comments on international and the new products.

Updating the charts

I plugged the latest numbers into the charts from my post on RIM in October (link). They generally look like good news:

Total BlackBerry Subscribers

(Quarters are RIM fiscal quarters)

Continued nice growth. But we'll come back to this one in a minute.

Net New Subscribers Per Quarter

This one is encouraging: additions went up compared to the quarter before. But it's only one quarter; over the year, the rate of additions is flat. Watch the next several quarters to see if there is a trend.

New Subscribers Per Unit Sold

Continuing to decline. If you're looking for bad news on RIM, this is probably the chart you focus on.

Device Gross Margins

Good news, they were stable for the quarter. This is another statistic where you want to look at the trend rather than just a quarter's results. And the trend for the last year looks stable, which ain't bad. (Remember, I have to estimate this number because RIM doesn't report device gross margins separately.)

Device Average Selling Price

Also stable for the last couple of quarters. Good news.

Service Revenue Per User

(Dollars per quarter.)

I didn't chart this one last time, but it's interesting. RIM currently gets about $15 in service fees per quarter per BlackBerry subscriber. That's the money operators pay to RIM per user for the email service. This revenue has been declining slowly but steadily for years, and I don't completely understand why. RIM says it's due in part to a shift toward prepaid customers, which would fit with the international growth they're seeing. But I wonder if also the operators are becoming less willing to share revenue with RIM. Anyway, I think it's a warning sign -- as your market matures you want to find ways to make more money per user, not less.

Adding up all of the results, it looks like a very nice quarter. But remember, one of my main points was that good short-term numbers can mask long-term problems. And in this case, the way RIM reports its numbers hides some challenges.

Looking ahead: A Tale of Two BlackBerries

Two issues really stuck out to me as I looked at the RIM announcement: International sales, and the comments by RIM's management.

In the post I wrote in October, I missed the importance of RIM's international growth. It was a significant oversight. Several people, starting with mobile analyst Dean Bubley (link), pointed out in comments on my blog that BlackBerry has become very popular among young people in many parts of Europe and elsewhere as a messaging phone. RIM also claims it is the number one smartphone platform in Latin America. Its appeal was explained by analyst Horace Deidu, who notes that the BlackBerry Messenger app is more attractive than generic texting because it's free, and because you can see when your messages have been read (link).

Deidu looked at RIM's most recent quarterly financials, and concluded that RIM's revenues had actually declined in North America, a fact masked by the company's rapid growth in other parts of the world (link). That surprised me, because it wasn't featured prominently in most of the reports on RIM's quarter. It was also pretty alarming. All of the charts above look relatively reassuring, but they're a blend of the international business and the North American one. Since the signs of an impending platform collapse are subtle (something I explained in my October post), it's possible that the international growth is disguising big warning signs in North America.

Unfortunately, RIM doesn't report early indicators like gross margin by region, so I had to look for whatever data I could find. I managed to dig out the numbers on the RIM subscriber base in North America vs. elsewhere. RIM doesn't report this directly, but you can calculate it from the quarterly reports. Here's what I found:

BlackBerry Subscribers

Total subscribers in millions

About half of RIM's subscribers are now outside North America (the crossover will probably happen this quarter). Growth in North America looks pretty slow. Here's what the subscriber growth rate looks like:

Quarterly Growth in Subscribers

Percent growth from quarter before

The BlackBerry subscriber base outside of North America has grown rapidly, increasing 15%-25% every quarter for the last three and a half years. North American growth was also strong until about 18 months ago (the second quarter of FY 2010), when growth softened. In the last two quarters, subscriber growth in North America dropped to almost zero.

Yikes. That sure smells like market saturation to me, and the process is a lot further along than I thought.

(Note: I had to interpolate the numbers for a few quarters in fiscal 2008 and 2009, because RIM didn't report them every quarter.)

So at the risk of oversimplifying a bit, the data and the anecdotes from around the world paint a picture of two RIMs: A consumer messaging phone company that has tapped into a new demographic and is growing fast in various parts of the world outside North America, and a prosumer e-mail phone company that has hit the wall in North America and needs very badly to re-ignite its growth through new products and services. It is the best of times, it is the...oh, you get the idea.

This explains a lot of the confusion we're seeing in attitudes toward RIM online. Like blind men feeling the elephant, we see the RIM that's in front of us -- either the consumer RIM that's growing well, or the prosumer RIM that has stalled out. Who's seeing the real RIM? We all are. The phone market is heavily segmented, and it's common for a company to do well in one region and poorly in another (just look at Nokia).

I have to give a lot of credit to the folks at RIM for managing to crank up the growth internationally just as its North American business faltered. I don't know if they were lucky or good, but it's a very hard balance to hit. On the other hand, I don't think RIM is doing any favors to investors by playing down the regional data in its financial reports. That creates a lot of confusion.

What it means for RIM. It looks like the North American business may be closer to a platform collapse than I realized. I think urgent action is needed to keep the company's North American users loyal. The silver lining in that dark cloud is that RIM's growth in other regions can help fund the changes needed. But time is short, and I still worry about RIM's ability to quickly focus on new differentiators and create compelling user experiences.

There's another path RIM could choose to follow -- it could milk its North American prosumer base for profits while accelerating its growth with young people overseas. But if you can trust the comments of RIM's execs, that is not their direction. They seem to believe they are on the verge of succeeding everywhere, in all segments. RIM co-CEO Jim Balsillie was effusive when he took questions in RIM's recent quarterly conference call (you can read a transcript here).

His message boils down to this:
     --PlayBook will be a huge hit.
     --The new QNX operating system is great.
     --Unlike other companies (Apple and Google), RIM will work in cooperation with mobile operators, content providers, and banks to produce services for customers. RIM will not bypass them, so they will steer customers to RIM.
     --Don't worry about the iPhone and Android app base, because mobile applications written to a particular OS will become less important in the near future, as users and developers look to support web standards and intermediate development platforms like Flash.
     --RIM provides the sort of reliability and security that enterprises want, so it will be the leading B2B mobile provider.
     --RIM is growing very fast, and has a lot of plans for 2011 that have not been fully revealed yet. Adding these all together, the company has tremendous opportunities in the coming year.

I was surprised by how relentlessly upbeat Balsillie's comments were -- most CEOs usually hedge their statements to avoid saying something that could be quoted in a shareholder lawsuit. Balsillie sounds like he's either extremely optimistic or extremely anxious to convince people not to write his company off. But I checked some of the previous calls, and it turns out he's always like that.

It's important that you understand the breadth and depth of RIM's ambition, so here are extended excerpts from his comments:

"We have real differentiation and we have real opportunities for extension of the business in a whole bunch of ways. I mean, just the pent-up interest in the PlayBook is really overwhelming, and then you know the whole aspects of carrier billing and value-added services -- you're just going to see a litany of things happening in that area, both for the BlackBerry tablet and the BlackBerry smartphone over the year....

"We're laying in the pieces here to sustain really exciting growth for a long, long, long time....we'll have some pretty pleasant surprises in what we're doing throughout the calendar 2011....

"We're selling lots...We have good products. Our engagement is good. I feel very, very good about U.S. I mean, we're meeting with the guys that run all the carriers, we've got plans, our carrier partners are in place. There is a real desire to do a lot of things and a lot of these things are locked in and new things are being planned....

"I feel great about where we're sitting for 2011 in the carriers in North America, and we've held our base and we've had growth in shipment and we've had okay net adds, but we're positioned to grow very, very strong. We've really knocked the cover off the ball in so many other markets around the world and yet our penetration in those are still very, very modest....We fell very, very good about the future....

"The product roadmap looks great and the application extension B2B and B2C is so strong.... You're going to see a lot of the stuff come out, really over the next month. So it should be very, very interesting....

"The interest in PlayBook in the B2B is uniformly strong....I can't think of an account that isn't just beating down to get units....Overwhelming interest and overwhelming pressure to get units are a pretty fair characterization. So we're very confident just what it's going to do for businesses....

"The core essence of the business is still just moving along so well and growing so fast. So if you layer in this tablet category, and then you layer in advanced services strategies and then you layer in leapfrog future-proved architectures, I feel very, very good about where we are in the U.S. I feel very good about where we are around the world.... Do I think we're in a position to really take where we are and extend it further in a sustained basis in the U.S. and abroad? In my view, without a doubt....Just watch the year unfold and watch 2011 unfold and you should know. I'm fine just letting the proof being in the deliverables. We do keep delivering and we're going to keep delivering, so we're just going to keep it up....

"I think the PlayBook redefines what a tablet should do. I think we've articulated some elements of it and I think this idea of a proprietary SDK and unnecessary apps -- though there is a huge role for apps, I think it's going to shift in the market and I think it's going to shift very, very quickly and I think there's going to be a strong appetite for web fidelity and tool familiarity. And I think there's going to be a rapid desire for high performance, and I think we are way ahead on that. I think, CIO friendliness is...we are way ahead on that....So I think the PlayBook clearly sets the bar way higher on performance and you're going to see more. I think the enterprise stuff, we're seriously extending. I think the BlackBerry is still number one in social collaboration. And I think with the PlayBook and that environment we're going to set the new standard on performance and tools, very powerful tools and we're growing very, very fast."

This is called tying yourself to the mast.

Maybe Balsillie is right. Maybe RIM's on the verge of enormous opportunity and explosive growth. I hope it is (seriously; I like RIM and I'd like it to succeed). But RIM is fighting on an enormous number of fronts, and that scares me for a company that has problems creating high-quality knockout products and is transitioning to a new operating system. The effect could be like flooring the gas in a car with a bad transmission -- you might get a surge of power, or you might leave half the engine on the highway. Restoring momentum to a stalled-out platform is a very difficult task, and it rarely goes smoothly, or succeeds in a single year. With all the hype the company is putting into PlayBook and the rest of its strategy, anything less than stellar success in all regions and all product lines in 2011 is going to be seen as a big disappointment. And that sort of disappointment could be the signal that causes users to turn away from its platform in North America.

As I said two months ago, I think RIM's future depends on its ability to focus, differentiate, and execute. I think the latest earnings just reinforce that.

[Note: This post was revised Dec. 22 to add a paragraph and clarify some explanations.]

Is Symbian dead? And if so, who killed it?

2010-11-14T21:22:00.000-08:00

"We should declare victory and go home."
--Apocryphal quote attributed to George David Aiken

I hesitate to write anything about Symbian, because it's a great way to get branded a parochial American, or an Apple fanboi, or a "member of the US-protectionistic mobs braying for blood," to paraphrase a comment from a tech discussion forum in the UK this month.

But there's been a huge cloud of smoke and very little light in the recent online discussions of the changes at Symbian. Is Symbian dead? Is it stronger than ever? What's really going on? I wanted to see if I could make sense of the announcements. Besides, there are some important lessons from the Symbian experience, and I'd like to call those out.

Here's my take on what's happened: The business entity called Symbian was originally designed to prevent Microsoft from controlling the mobile OS standard, without having Symbian itself seize control over the mobile phone companies that funded it. In that task it succeeded. However, as a company run by a consortium, Symbian's governance was politicized and inefficient. This left Symbian woefully unequipped to compete with Apple and Google. A different approach was needed, and Nokia's new management has finally come to terms with that. As a result, Symbian as an organization is now defunct, and Symbian as an OS is becoming background infrastructure that has little relevance to the mobile platform wars.

To explain why I reached that conclusion, I have to start with a quick refresher on Symbian's history, for readers who haven't been following it closely...

There are two things named Symbian: Symbian the company and Symbian the OS. Some of the confusion this month was caused by people mixing up the two things. Symbian OS began as EPOC, the operating system used in Psion's handheld devices. EPOC was spun out of Psion in 1998 as a separate company called Symbian, co-owned by Psion and most of the leading mobile phone companies of the day, led by Nokia. The idea was that all of them would use the renamed Symbian OS in their smartphones, enabling them to put up a unified front against Microsoft, which they feared would rule the smartphone market.

Over time Nokia came to be the dominant manufacturer of Symbian OS phones outside of Japan, largely (in my opinion) because the Symbian phones made by other mobile phone companies didn't sell well. Eventually the other mobile phone companies no longer wanted to pay for a joint venture that was mostly just supplying software to Nokia. Linux was gaining momentum as a free, open source mobile OS, so the Symbian partners, led by Nokia, decided in 2008 to convert Symbian OS into an open source project. Nokia hired most of the Symbian engineers, and gave away their code through the foundation.

Symbian the company was replaced by the Symbian Foundation, a nonprofit tasked with managing the open source process and encouraging other companies to sign up to use the software. The idea was that Nokia, the other Symbian licensees, and a growing hoard of academics and developers would work on various parts of the OS, contributing back their modified code to the shared base. The move to open source kept some level of engagement from several other mobile phone companies, most notably Samsung and SonyEricsson.

But both companies continued to have poor sales for their Symbian phones, and this fall they announced that they had no further plans to use the OS. That left DoCoMo in Japan as the only other major user of Symbian. Nokia was stuck with an open source foundation that mostly just supplied its own software back to it. That wasn't going to be viable. So earlier this month, Nokia and Symbian announced three significant changes:

--The Symbian Foundation is being dramatically scaled back to "a legal entity responsible for licensing software and other intellectual property, such as the Symbian trademark." (link). In other words, it's just a shell. Symbian is now truly Nokia's OS. Nokia will plan, develop, and manage the Symbian code base, and distribute it directly to anyone who still wants it (presumably DoCoMo). You can read a biting commentary on the changes here.

--At the same time, Nokia reaffirmed an announcement it made in October that it is focusing all of its application development support on the Qt software layer that it purchased several years ago (link). Qt will now apparently be Nokia's one and only application layer, deployed on both Symbian and the upcoming MeeGo OS being codeveloped with Intel (link).

--The EU is putting 11 million Euros into a new organization, called Symbeose (which stands for "Symbian – the Embedded Operating System for Europe"), which will help fund the development of advanced Symbian OS features, including asymmetric multiprocessing, dev tools, memory management, image processing, video acceleration, speech to text, mobile payment, multimedia formats, and embedded systems beyond mobile. There are two semi-conflicting explanations of what Symbeose is all about. Some people say it's aimed at turning Symbian into an embedded OS that can run in all sorts of devices (why Europe needs that instead of Linux is unclear to me, but you can hear some discussion of the wrongheaded North American mobile paradigm here). Others say the intent is to resurrect Symbian OS as a smartphone OS used by companies other than Nokia. In a presentation, Symbian Foundation said the investment is intended to "combat mobile device and service homogeneity exemplified by Android and iOS" (link). Apparently taxpayer support is needed because Nokia isn't willing to pay for some infrastructure needed by other phone companies (link). A Symbian Foundation employee explained: "I would say that the main focus of the developments will be advancing existing, as well as building new tools and services relevant for smartphone manufacturing at the beginning of the manufacturing process. We want to make it easier for any manufacturer to take the Symbian codebase and develop new smartphones" (link).

What it means

Symbian isn't dead. It's just irrelevant. After the announcement, Nokia professed its strong support for Symbian OS (link). Nokia has no choice but to support the OS because it's built into the whole middle to top end of the Nokia product line. Given all of the legacy Nokia code written in Symbian OS, the Symbian-based phones still in development, and all of the Nokia development teams who are used to working in Symbian, it would probably take years to flush all of the Symbian code out of Nokia's products even if it wanted to. Symbian at Nokia is kind of like Cobol at IBM -- you're going to go on tasting that particular meal for a long time to come.

But the decision to focus on Qt for applications means that Symbian OS is effectively no longer an app development platform. It's embedded software; the background plumbing that powers Nokia's smartphones (and maybe other embedded systems, if the EU has its way). There's nothing wrong with that, but it makes Symbian irrelevant to most of the folks who talk about mobile technologies online. We don't spend much time online debating which OS kernel a device should use, and that's now the world Symbian lives in. The real competition for developer and smartphone user loyalty in most of the world is now Qt vs. iOS, Android, and RIM. Plus that Windows thing.

What it means for Nokia: Hope. Nokia's app recruitment efforts have been hamstrung for years by what I think was an incoherent software platform story. What should developers write their software on? Symbian native, S60, Silverlight, Qt, Adobe Air, Java...at one time or another Nokia romanced just about every mobile platform on the market. Nokia said that was a strength, but actually it was a sign of indecision and internal conflict. Developers crave predictability; they want to know that the platform they choose today will still be supported five years from now. By flitting from platform to platform like a butterfly, Nokia sent the unintentional signal that developing for it was dangerous.

Many developers did support Nokia anyway, especially in places where the Nokia brand and market share were so dominant that the decision was a no-brainer. But I think their loyalty did a disservice to Nokia in some ways, because it blinded the company to the shortcomings in its developer proposition. When Nokia had trouble recruiting developers in places like Silicon Valley, it seemed to think they were just biased against it. Time and again, I attended Nokia developer events in California where Nokia concentrated on telling people how big its installed base was, and showing off its latest hero device (N97, anyone?). I can see Nokia's logic -- after all, developers in Europe seemed happy. But the reality was that developers in Europe had given it the benefit of the doubt, despite its poor overall proposition.

So the decision to focus on Qt (pronounced "cute," get used to it) is a positive one, in my opinion. This is one of those cases where making any decision is better than the status quo. Qt isn't perfect, but if all of Nokia aligns behind it, any problems in it can be ironed out.

Unfortunately for Nokia, this is just the beginning of the changes it needs to make, rather than the end. Nokia's Qt development tools still reportedly need work (link). And app developers don't just need a coherent technical story, they also need a coherent business story. How do they make money? Although Nokia sells a huge number of Symbian-based smartphones, most of their users seem blissfully unaware that they can add applications. That's why Nokia has a much smaller base of applications than iPhone, even though its customer base is far larger.

To attract more developers, Nokia will need to do a lot of marketing, both in advertising and on the device, to make sure Qt users know they can get apps, and are stimulated to try them out. Nokia has the resources to do this, but once again it'll need consistent and well coordinated execution to make it happen, something that the company has failed to deliver in the past. (For example, spamming people with SMS messages telling them to try other features is probably not the right approach (link).)

To give you an idea of how much ground Nokia needs to make up, Apple iOS has 60 million users and 225,000 applications, a ratio of about 3.75 applications per thousand users. Android is close behind, with 3.5 apps per thousand users. In contrast, Symbian has 390 million users and 7,000 native apps, a ratio of about .02 apps per thousand users. (link). Yes, I know, there are additional Nokia apps written in Java, but that kind of proves the point that Symbian is plumbing rather than a platform.

All of these changes need to be carried out against a backdrop of cost cutting, as Nokia brings its expenses in line with its revenues. One of these days when I get the time I'll write more about Nokia's overall situation, but for now suffice it to say that Nokia is working off the after-effects of several years of growing expenses while revenue was stagnant. Nokia's circumstances aren't quite as bad as the California state budget (if you are in Europe, think Greece), but it's ugly enough to distract from all of the other things the company needs to fix.

What it means for developers: Wait. First, the bad news: The switch to Qt means that current Symbian OS developers who aren't already using Qt will need to rewrite their applications. This is the latest in a series of rewrites that Nokia and Symbian have forced on developers over the years. If they had more developers it probably would be causing a big ruckus right now. The fact that you don't hear a lot of screaming speaks volumes.

The good news is that Nokia may be getting its act together for developers at last. But if I were working on a mobile application today...wait a minute, I am working on a mobile application today. So here's what I'm doing about Nokia: I'm waiting. If Nokia creates a great business proposition for developers and sticks to it, our team would be delighted to support Qt aggressively. Who wouldn't want to sell to a base of 400 million users? But given Nokia's history of whipsawing its developers, we won't take anything for granted. In particular, we want to see if Qt is actually the exclusive development platform for MeeGo, rather than just a secondary option. You've got to show us the consistency, Nokia.

Oh, and ignore Symbeose. I don't know exactly how the Symbeose initiative got started, but to me it looks like the Symbian Foundation lobbied for it for a long time, prior to the recent changes in the Foundation. For the old Foundation, Symbeose made sense, because it was a clever way for a nonprofit to get some OS development done in areas that Nokia didn't care about. But with the Foundation mostly gone, Nokia has no incentive to turn Symbian into a general embedded OS, and in fact it says MeeGo is its OS for use in non-phones. In that situation, I can't picture a lot of other companies committing to build Symbian OS into their products.

Lessons from the Symbian Foundation's demise

I'm seeing a lot of interesting rationalization online about Symbian's fate. For example, Tim Ocock, a former Symbian employee, wrote a fantastic post (link) in which he argues that Symbian was very successful as an OS for phones with PDA features, but was never designed for running browsers and lots of applications. That's a pretty shocking statement, considering how many times I heard Symbian advocates boast about the sophistication of their modern, general purpose OS compared to clunky old PDA-centric Palm OS. Remember, this is a company that until very recently was bragging about its superior implementation of symmetric multiprocessing (link), hardly something you need for a PDA.

But I think Tim is dead-on in most of his analysis. He did a great job of detailing the technical and attitudinal flaws within Symbian itself, so I won't bother repeating them here. Instead, I want to talk about the flaws in Symbian's governance.

Did Symbian fail? The companies that founded Symbian had two goals in mind: to prevent Microsoft from dominating the market for smartphone software, and to prevent Symbian itself from becoming a power that could dictate to the phone companies that funded it. As a result, Symbian's governance structure was designed with a complex system of checks and balances that wouldn't apply to a normal company. To make major decisions, Symbian had to negotiate a consensus among its owners the mobile phone companies, who understood little about the management of a mobile platform and were suspicious of each other and of Symbian itself.

This bureaucratic, highly politicized oversight process repeatedly forced Symbian into blind alleys, and prevented it from doing things that a "normal" OS company would take for granted. When Symbian was founded, there was talk of an eventual IPO. The prospect of an IPO is an important recruitment tool -- it lets you use stock to hire ambitious engineers and managers. But the idea was eventually shot down by the owners; it would have made Symbian too independent.

Crippled by design. Once the threat from Microsoft receded, the owners' second goal for Symbian -- preventing it from competing with them -- seemed to dominate their treatment of Symbian. I'm not saying there was some central evil plan to hamstring Symbian; there wasn't. But everything the company planned to do had to be approved by the handset companies, and on a case by case basis they vetoed the things that sounded threatening to them. Over time, this forced Symbian away from initiatives and features that would cause users and developers to be loyal to the OS rather than the handset.

So Symbian didn't create an app store, and Symbian's developer relations were very confused because Nokia wanted to do a lot of that itself. But the most egregious example was user interface, which Symbian worked on from time to time, but was eventually forced out of by its owners. When I was at Palm, the Symbian project I feared most was "Quartz," the effort to create an icon-driven touchscreen UI for Symbian. Quartz looked very nice, and if it had survived Symbian would have had a dandy iPhone competitor on the market before the iPhone launched. But politics between Symbian's owners forced it completely out of the UI business, and Quartz was spun out into a separate company called UIQ, which went bankrupt in 2009.

You can get more details on the whole sad Quartz saga here.

Quartz circa 2001

An OS without a single consistent user interface is a nightmare for software developers, because they can't write apps that run across the installed base of devices.

Eventually, in the face of all the restrictions, the most ambitious, nonconformist people at Symbian -- the ones who drive innovation in any organization -- seemed to drift away in frustration or were forced out when they irritated the owners. Symbian itself retreated into focusing on technological esoterica like symmetric multiprocessing -- things that didn't really differentiate the platform to users, but that the licensees wouldn't object to.

From one perspective I guess you can say Symbian was a complete success, because it fulfilled the two negatives that its founders wanted: Microsoft didn't dominate mobile software, and Symbian itself didn't exercise any control over its founders.

However, the cumulative effect of the handset companies pursuing their short-term interest was that Symbian was utterly unready to respond when Apple and Google entered the market. I don't think either Nokia or Symbian really understood how the game had changed. Apple designs phones as integrated systems, with the software and hardware tightly coordinated. Nokia could never achieve that level of coordination with an operating system managed through standards committees.

And as for Android, Nokia apparently thought that open sourcing Symbian would create a level playing field with Google's free OS. But I think the structure of the Symbian Foundation made that impossible.

The fatal flaw of the Symbian Foundation. Although Android is a free product, it's supported by a for-profit corporation that has massive resources. The attraction of Android to phone companies isn't just its price, but its safety -- Google stands behind it with marketing and technical support.

In contrast, Symbian Foundation was designed as a rigorously noncommercial institution banned from any business activity. People at the Foundation told me Nokia was adamant about enforcing the ban on commercial activity because it was afraid the tax authorities might rule that the foundation wasn't a nonprofit, endangering the tax credit that Nokia got for donating its Symbian code base.

Most open source companies give away their software in order to make money from some other mechanism -- consulting, or support, or a for-fee version of the same code. Symbian Foundation was banned from making money on any of these activities, meaning it could never become financially self-supporting.

Forget about marketing support; Symbian couldn't even offer enhanced technical support to licensees who were begging to pay for it. That was especially crippling because Symbian OS is notoriously complex and difficult to program (link).

Consider this quote from Tim Ocock's article:

"The difficulty of writing good Symbian code was hugely beneficial to Symbian as a business in the early days. For many years, 80% of Symbian's revenues were earned through consulting for licensees....Symbian’s licensees...each had their own proprietary telephony chipsets that needed to be integrated and their own customisations to the platform in mind....Despite talk of Symbian enabling differentiation, the reality was licensees' budgets were squandered on hardware porting and making the core platform fit for purpose."

Picture yourself as a manager at a handset company, choosing an OS for your smartphone. The Symbian option has no advertising support, requires customization, is hard to program, has few third party consultants to support it, and the company licensing it won't help you do the programming. Meanwhile, Google Android is more modern, is based on Java and Linux so it's easy to find programmers, has lots of support, and has user-friendly features like an app store. Which one seems the safer bet?

How could the Symbian Foundation ever succeed in that situation?

Although people advocating for a "European" mobile OS often complain that Android had unfair financial advantages, the fact is that Symbian was ripe for the picking, a situation that was almost entirely self-inflicted.

The lesson for other tech companies: Open source is not magic pixie dust that you can sprinkle on a struggling product to turn it into a winner. Open source is a tactic, not a business strategy. It has to be paired with a business plan that says how you'll make money and drive innovation.

This is the end, my friend, of our elaborate plans

Like an army refighting the last war, Symbian was designed to defeat Windows Mobile, but never came to terms with its new adversaries Apple and Google. There's no shame in that for most of the folks who worked at Symbian; they did the best they could to navigate the politics of Nokia and all the other Symbian licensees. But radical change was necessary. I hope Nokia's Qt strategy will be successful. And I'm sure that Symbian code will continue to serve for years as the underlying technology for millions of Nokia smartphones. But except in the dreams of a few EU officials, Symbian OS is now just legacy plumbing.

It's time to move on.

Will E-Readers Eat the Tablet Computer?

2010-11-09T18:13:00.000-08:00

The consensus prediction in the tech industry is that tablet computer sales will swamp sales of ebook readers. The Huffington Post is taking bets on which e-readers are dead meat (link), and Informa predicts that e-reader sales will start declining in 2014 as tablets out-compete them (link). I've seen similar (and more pessimistic) private forecasts from other analysis firms. They all argue that it's just a matter of time until general-purpose tablet computers displace more limited e-readers.

Yes and no. I think tablet features will eventually take over, but it would be very premature to assume that tablet computer companies will be the long-term winners. They're actually at a huge disadvantage that almost no one is talking about.

What brought this home to me was a brief hands-on experience I had last week with the Barnes & Noble Nook Color. I usually think of Nook as the poor stepchild to Amazon Kindle, and in unit sales it certainly is. But Nook Color isn't just an ebook reader. It's a full tablet computer, or at least it will be if Barnes & Noble allows it to be. And it sells at a great price.

The easiest way to explain my reaction to Nook Color is to compare it to the Samsung Galaxy Tab. The first thing I noticed was basic ergonomics. As I wrote recently, when I first picked up the Galaxy Tab it worried me because it was hard to hold -- its slick plastic surface felt like it was going to slip out of my hand, and so I couldn't hold it comfortably without putting my thumb on the screen (link). The Nook Color is almost identical to the size and weight of the Galaxy Tab, so I expected to have the same problem. But the Nook has a brushed metallic-feeling surface that's much easier to grip. Attention to detail has a huge impact on mobile products, and Nook Color shows far more attention to detail than the Galaxy Tab.

The Galaxy Tab definitely has more features than the Nook: two cameras, 3G options, and an accelerometer. But Nook Color has all the basics, including Android OS, a touchscreen, and very nice color display that I think is the equal of Samsung's. And it has one important feature that The Galaxy Tab lacks -- an affordable price. A Nook Color with WiFi is $249, literally half the price of a similarly-equipped Galaxy Tab.

That's a stunning difference, especially considering that Samsung usually tries to be a price leader in new technologies. At $499, I think the Galaxy Tab will be a very difficult purchase for the average consumer. At $249, Nook Color isn't cheap, but it's a mainstream consumer product.

So how in the world does a book-seller get a 50% price advantage over a major consumer electronics company?

The difference isn't mostly due to features. I bet the accelerometer and cameras in the Galaxy Tab don't add more than $20 to its cost, probably less. The Tab probably has a faster processor as well, but no way does that justify the cost difference. I think two other factors are involved. The first is that B&N owns its own retail stores, and so it doesn't necessarily have to mark up the price of the Nook with the full traditional retail margin. In contrast, Samsung will be expected to fork over the usual 20 points or so of margin to its dealers, plus additional comarketing dollars to buy shelf displays and Sunday newspaper ads. Second, since B&N makes money from the content it sells to Nook users, it can afford to sell the hardware at lower cost.

In other words, the Nook is a subsidized product, like a cellphone. So is Kindle.

I think the people predicting that tablets will swamp e-readers haven't thought through the economics of the situation. As long as e-readers are based on e-ink displays, they can't compete directly with tablets, because the displays are grayscale and are too slow to display animation and video. But an e-reader with an LCD display is physically a tablet, at a much more attractive price.

Subsidized products usually beat unsubsidized ones. Even Apple had to move the iPhone onto subsidies after it first launched it without.

The only thing stopping Nook Color from competing directly with tablets is software. Although Nook Color runs the Android OS, same as Samsung, Barnes & Noble is reportedly planning to severely restrict the applications that will run on Nook Color. The idea is to keep the device focused as an e-reader rather than allowing it to become a general-purpose tablet.

It's unusual for a company to artificially restrict what you can do with a computing product, but there is a perverse logic to what Barnes & Noble is doing. If someone buys Nook Color as a tablet and doesn't buy any books or other content for it, Barnes & Noble will make less money. By restricting the apps, Barnes & Noble can chase away those lower-margin customers who aren't hardcore readers.

But I think that's a very short-sighted policy, for two reasons:

First, as a dedicated e-reader, Nook has important drawbacks. Its battery life is much shorter than an e-ink device, and it's a lot more expensive. If the apps are restricted, Nook Color is a tweener. It's inferior as an e-reader and as a tablet.

Second, B&N is missing a huge opportunity. It's not like they're losing money on Nook Color sales (the hardware cost is probably in the $150 range, or lower). As long as you're making some money per unit, I think it makes sense to grab as many customers as you can now, while you have a structural advantage in the market.

The ultimate payoff for an ebook distributor like B&N is to displace the publishers and start selling ebooks (and other content) directly to the public. To get to that goal, B&N should be trying to grow the e-reader installed base as quickly as possible. Instead of restricting Nook Color to people who already want ebooks, B&N should sell it to everyone and then entice them into becoming e-reading users.

Historically, some of the most successful computing products were sold first as single-purpose devices that then blossomed into multipurpose devices. PCs were first adopted in volume to run spreadsheets, and the first successful PDAs were sold as electronic calendars. Nook Color could be the e-reader that ate the tablet market.

And it's easy to do -- all B&N has to do is say yes to all types of third party apps. Get out of the way, and the customers will take care of the rest.

What is Samsung thinking?

2010-10-22T09:21:00.000-07:00

This is an interesting time for tablet computing fans, with the HP Slate (link) being announced today and a revised B&N Nook (link) supposedly being announced next week. Meanwhile, I'm still coming to the terms with the pricing Samsung announced this week for its upcoming Galaxy Tab.

I had a very strong negative reaction to the price, but I wanted to wait a couple of days to see how I'd feel after I had time to think about it. So now I've thought about it, and here's my reaction:

$600 for a seven-inch tablet?? Are you freaking kidding me? A whole netbook costs about $400. Why does it cost $200 extra just to remove the keyboard?

I don't understand Samsung's strategy. A $400 device is maybe an impulse buy for a rich person at Christmas. A $600 device is a carefully considered investment for most people, especially when all the most enthusiastic tablet buyers have already been siphoned off by Apple.

I got a chance to play with a Galaxy Tab at CTIA. The interface is very cool, but I kept asking myself what I'd actually use it for. What problems does it solve that you can't solve with a smartphone? Samsung appears to assume that Apple has created a market for generic tablets to do, you know, tablet stuff. But has it? Or has it created a market for iPads that seamlessly handle lots of content and unique applications?

And although the design of the Galaxy Tab looks nice, I think the ergonomics of it are questionable. Despite what Samsung's publicity photos show, the device is a bit too wide to hold comfortably even in my dinnerplate-sized hand. To hold it securely, I needed to put my thumb on the front of it. But the margins around the screen are so narrow, and the back case is so slippery, that I felt like I was going to drop it when I put my thumb alongside the screen. The weight of the device also put uncomfortable pressure on my thumb (it's a lever effect). My grip felt more secure and comfortable if I put my thumb on the screen, but then I would accidentally press icons and interfere with the interface.

Although Samsung likes to talk about itself as a leader, in practice it's usually a fast follower -- give it a device to copy and it'll turn out its version faster than just about anyone else on the planet. If the device sells, great. If it doesn't, Samsung just moves on to the next device. My guess is that's what it'll do with the Galaxy Tab.

I'm hoping for better from other new products, although I'm not encouraged by what I'm hearing about the HP device (for one thing, Friday is a terrible day to announce a product because your news coverage gets cut off by the weekend). But I'd like to get my hands on that one before I make up my mind about it.

(Note: This post was modified on 10/22 to correct the announcement date for the HP Slate.)