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

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.

How to Shape the Mobile Data Market

(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.

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

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: An Excess of Cleverness

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

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.

Checking in on smartphone and Twitter usage

Over at Rubicon, we just did a quick consumer survey to check the status of a couple of hot topics in the tech industry, smartphone adoption and use of Twitter. I thought you might be interested. Here's a summary of what we found, and links to the full articles:

Smartphone adoption: RIM leads. In the US, about 10%-11% of the adult population uses smartphones. RIM has just under half of the installed base, followed by Apple at about a quarter.

The users of different types of smartphone have different feature priorities. iPhone users rate web browsing as their #1 feature, followed closely by e-mail. RIM users rank e-mail the most important feature, Palm users choose calendar, and Google phone users are partial to mapping. The profile for Windows Mobile users is similar to RIM's, but less enthusiastic about e-mail.


Mobile phone feature priorities of iPhone users compared to all mobile phone users. Percent of US users ranking a feature in their top four.

I think this is more evidence of something that I've been saying for a while -- most people buy phones more like they do appliances than like computers. They decide which functions are most important to them, and then pick the phone that does those things best, rather than looking for the best general-purpose device.

That's not to say that flexibility doesn't matter at all, but it's secondary. For example, adding third party apps is the #4 priority among iPhone users, and close to tied with several other features. It will be interesting to see how the priority evolves as Apple continues to advertise the daylights out of the app store.

For the full article, click here.

Twitter is a form of entertainment. Usage of Twitter is rising very rapidly -- as of April, it gets more daily visitors than cnn.com in the US, according to Alexa.com.

Our survey showed that the Twitter user base has more than doubled in the last six months. About 10% of US computer users have tried Twitter so far, and about a third of those people have stopped using it. You can decide for yourself if that's a big number or not, but a certain amount of churn is inevitable in any new web service.


Twitter awareness and usage among US PC users.

Most Twitter users say they are casual users of the service, and that it doesn't play an important part of their personal or business lives. The most active 10% of Twitter users say it does play an important role in their personal lives, but not in their business lives.

The overall pattern of usage indicates that for most people Twitter is currently a form of casual entertainment. There's nothing wrong with that, but the future of Twitter will depend on how that usage pattern evolves. Will Twitter become as important as e-mail, or will it be a fad like citizens' band radio (link)? It's too early to tell. But it's already clear that it's a separate medium with its own rules. Companies looking to use Twitter should make sure they understand how it's used; it's not the same as blogging.

For the full article, click here.

Watch out for RIM

Based on what you read in the press, you'd think Apple had conquered the entire smartphone market, or maybe that they invented it in the first place. But to me the most surprising story in recent smartphone sales isn't Apple, it's the continuing rapid growth of Research in Motion.

Check out the latest numbers from Gartner (link). As you know if you've been reading this weblog for a while, I have very little faith in third party market share numbers. They're compiled from shipments self-reported by the vendors, and are subject to all sorts of inaccuracies (link). But they do give a very rough picture of what's happening in the market, and the picture they've been drawing recently is mildly astonishing.

Nokia is still the smartphone share leader, with about 41% unit share. But that's down 10 points from a year ago, on a shipment decrease of about 17% year over year. RIM is number two, with over 19% share and shipments up about 85% year over year. Apple is in third: 11% share, up 110% year over year.

So, roughly speaking, in smartphones Nokia is about twice the size of RIM, and RIM is about twice the size of Apple.

I have to put a caveat on that. Quarterly share and shipment growth fluctuates a lot depending on whether a company has just introduced a new product or is clearing inventory in preparation for a launch. So you have to look at several quarters:


Unit smartphone shipments, worldwide, in thousands. Source: Gartner.

That gives a slightly less apocalyptic view for Nokia. It had particularly huge shipments in Q4 of 2007, so it's down year over year, but overall its shipments are flat rather than collapsing. RIM and Apple are both definitely growing fast, though, with Apple's shipments fluctuating a lot as it adjusted inventory before and after the shipment of the iPhone 3G.

But let's put this all in perspective. The definition of "smartphone" is very sketchy; the way Gartner uses the term today, it refers to basically any phone that has an externally-programmable OS in it. Nokia deploys the Symbian OS in all of its high-end phones, so they are all classified as smartphones. So RIM's not really beating up on Nokia's smartphones, it is currently out-growing the entire top end of Nokia's product line. Project out the current trends for a year, and RIM would be close to overtaking Nokia in smartphones. No matter how you parse the numbers, that's pretty amazing.


Why don't you just die already?

This situation is all the more surprising considering that conventional wisdom has said for years that RIM was doomed. First e-mail phones were just a fad, an extension of the pager market. Then they were just a vertical product that only a few specialized groups like stock brokers would care about. Then Microsoft was on the verge of destroying RIM (not once, but every time a new version of Windows Mobile came out). Then RIM was fated to fall into irrelevance unless it licensed Blackberry clones. And on and on...

Fortunately, RIM completely ignored conventional wisdom and stuck to its core business. The rewards have been immense. In its most recent quarterly report (in December), RIM had a revenue run rate of about $12 billion a year, up more than 60% year over year, and profit of about $1 billion a year. The company now employs about 12,000 people. For comparison, RIM's revenue is now about the same as Apple's was four years ago.

Companies with $12 billion in revenue aren't supposed to grow 60% a year, especially when the economy is gasping, so I'll be intensely interested to see RIM's next quarterly report on April 2. In this economic climate I won't take anything for granted. But keep in mind that Nokia is already making ominous noises about its sales (link), while RIM says its unit growth has been accelerating (link).


Face reality

I think the big message from these numbers is that the analysts and press have done a terrible disservice to all of us by creating the fiction that there is a unified smartphone market. That hides the real news. For example, IDG's writeup on the Gartner sales report focused on overall growth of smartphone sales and didn't even mention RIM until the sixth paragraph (link).

I use the term smartphone "market" here for convenience, but as I've said before, there really isn't a single unified smartphone market and there probably never will be, because different people want different things from their phones (link).

If you look carefully at the shipment numbers, this is blindingly obvious. The smartphones from RIM (and Apple) are differentiated products that have special features appealing to particular segments of users (RIM for e-mail fanatics, Apple for entertainment-hounds). They solve customer problems in unique ways that people can value, so their sales are relatively resistant to an economic downturn. Not immune, but I think they're likely to fall less than the others.

And since Apple and RIM serve different markets, they can grow rapidly side by side. One doesn't usually steal sales from the other.

But Nokia has never had a strong play with this sort of product. Most of its smartphones are bought as high-end mobile phones, purchased by technophiles and status-conscious people with money. When the overall phone market slows down, they slow down too.

The analyst numbers told Nokia a comforting fantasy that it was the dominant smartphone company, when in fact it was a very secondary player in the markets served by RIM and Apple. I think this let Nokia avoid the agonizing changes in product development that are required to make a truly differentiated smart phone.

Instead, Nokia has gone off on tangents attacking Google, Microsoft, iTunes, and just about every other target I can think of in computing. It's a bit like a guy at his home putting up wallpaper in the upstairs bathroom while out in the yard his car is on fire.

I continue to be intrigued by parts of Nokia's strategy, especially the Ovi services suite. Nokia will be able to push Ovi out to hundreds of millions of mobile phone users. In theory, that might be a very powerful way for the company to build a mobile data business. But it could be crippled if the most data-hungry users have already been siphoned away by Apple and RIM.


What happens to RIM?

The question about RIM is what are the natural limits on its growth. Not everyone wants an e-mail phone, although RIM has already stretched the market a lot more than I thought they could. But I think the bigger threat may actually be within the company. Beyond about $10 billion in revenue, a tech company starts to require different management techniques. There's enough going on that management has to delegate much more than it did in the past, and processes have to be set up to ensure quality work and smart decision-making in the lower reaches of the company. That transition is incredibly hard for the leaders of a startup to make, and I wonder if the bug-filled launch of the Blackberry Storm wasn't a symptom of a company growing beyond its processes.

On the other hand, RIM has such a long history of beating my expectations that I'm not going to bet against them again.

Does anybody really know what smartphone market share is?

An article in Wired online this week had a chart showing US smartphone market share (link). The chart gave more detail than I've seen recently from other research companies, so I thought it was worth reproducing the data here:



The source is Nielsen Mobile, formerly Telephia. The interesting thing about them is that they do much of the service quality monitoring for the operators, so they have much more direct access to mobile usage information than folks like IDC and Canalys, the people usually quoted for smartphone share.

Wired was focused on Palm's loss of market share, which is indeed striking (but not exactly news). But take a look at the chart again; there are a couple of other items that I think are more newsworthy.

The first surprise is that Nielsen shows Apple in fourth place in smartphone share. That's wildly different from what Canalys, the source usually reported, has been saying (link). Here's how they compare for Q4 2007:




What in the world is going on here?

I'm not sure, but I have some guesses. Canalys doesn't directly measure market share, it receives self-reported shipment reports from the manufacturers and then adds them up. That means Canalys measures shipments into the channel rather than sales, and it depends on the hardware companies to be honest.

Riiiight.

Nielsen Mobile doesn't explain on its website exactly how it measures share, but apparently it's using a mix of survey results and the usage data it gathers from the operators (link). So its numbers should reflect current usage of phones rather than shipments. If Nielsen is measuring installed base share, rather than share of current sales, that might explain the difference. Although in that case, share should not be changing as fast as Nielsen shows. So I'm still confused.

If anybody can shed more light on the source of the difference, please post a comment. I've also asked Nielsen, and will let you know if I hear anything.

The conflict in the numbers underlines how ridiculously useless the publicly-available third party sales numbers are in the mobile phone market, and how little attention the press is paying to the inconsistencies. Apple's share varies from 8% to 28%, and no one even notices. Hey, we got a pretty chart and it confirms what we wanted to say, so don't ask questions.

If you want more information on the problems with mobile market share tracking, I wrote a detailed post here (link).

I said there were two newsworthy things about the Nielsen numbers. Can you spot the second one?

That's right, since the iPhone was released, RIM has been gaining share. So much for the folks who predicted at the launch of the iPhone that it was going to take the smartphone market away from RIM. Instead, at least in the first round of competition, we see what you'd expect from a segmented market -- RIM appeals to some customers, Apple appeals to a different group, and both companies do well.

I can't wait to see what the numbers will look like in six months, after the iPhone 3G has been out for a while. Although probably Canalys and Nielsen will still disagree wildly on what's happening.