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

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.)

RIM's Q3 Financials: A Tale of Two BlackBerries

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.]

What's really wrong with BlackBerry (and what to do about it)

Just a couple of weeks after Research in Motion turned in a good earnings report, the death watch over the company has resumed, with Business Week magazine running a long article that mocks co-CEO Jim Balsillie (even picking on his duck-emblazoned tie) and saying that RIM needs to learn how to market as well as Apple (link).

Business Week quoted Balsillie at a press briefing:

"There's tremendous turbulence in the ecosystem, of course, in mobility. And that's sort of an obvious thing, but also there is tremendous architectural contention at play. And I'm going to really frame our mobile architectural distinction. We've taken two fundamentally different approaches in their causalness. It's a causal difference, not just nuance. It's not just a causal direction that I'm going to really articulate here -- and feel free to go as deep as you want -- it's really as fundamental as causalness."

OK, he deserves to be mocked for that. But Business Week goes on to conclude that his quote captures the whole dilemma of the company -- technical sophistication coupled with incoherent marketing.

Business Week has joined a large and distinguished group of experts taking jabs at RIM. Morgan Stanley recently downgraded RIM's stock, saying it's going to lose share faster than previously expected (link). Gartner reported that Android had passed BlackBerry to become the most popular smartphone OS in the US (link). And CNET said RIM is about to be kicked out of the enterprise market (link).

I've been getting very tired of the criticisms of RIM, because most of them seem superficial and some are petty. Yes, Android is doing well, but neither RIM nor Apple is giving away its operating system, so it was close to inevitable that Android would eventually get the unit lead. It's the default choice for most smartphone companies, so of course it moves a lot of units in aggregate. But there is room in the market for several mobile platforms to succeed. The companies Android is hurting most are Microsoft, Access, and others that were hoping to sell mobile operating systems.

Yes, RIM's not good at sexy marketing, but it has always been that way. People have been predicting its imminent doom for as long as I can remember (do you recall when Microsoft Exchange was supposed to destroy it?). My guess is that the folks at RIM are shaking their heads at all of the bad press and assuming it will once again blow over in a quarter or two.

I think that would be a serious mistake. In my opinion, RIM is indeed in danger, probably a lot more danger than its executives realize. But I don't agree on the reasons most people are giving for why RIM is in trouble, and I think most of the solutions that are being proposed would make the situation worse, not better.

The fault lies not in our ties, but in our selves. In my opinion, RIM's real problems center around two big issues: its market is saturating, and it seems to have lost the ability to create great products. This is a classic problem that eventually faces most successful computer platforms. The danger is not that RIM is about to collapse, but that it'll drift into in a situation where it can't afford the investments needed to succeed in the future. It's very easy for a company to accidentally cross that line, and very hard to get back across it.

There's a lesson in RIM's situation for every tech company, so it's worthwhile to spend some time understanding what's happening.


How a computing platform dies

To explain RIM's challenges, I have to give you a little tech industry history. When I worked at Apple, I spent a lot of time studying failed computer platforms. I thought that if we understood the failures, we might be able to prevent the same thing from happening to us.

I looked at everything from videogame companies to the early PC pioneers (companies like Commodore and Atari), and I found an interesting pattern in their financial results. The early symptoms of decline in a computing platform were very subtle, and easy for a business executive to rationalize away. By the time the symptoms became obvious, it was usually too late to do anything about them.

The symptoms to watch closely are small declines in two metrics: the rate of growth of sales, and gross profit per unit sold (gross margins). Here's why:

Every computing platform has a natural pool of customers. Some people need or want the platform, and some people don't. Your product spreads through its pool of customers via the traditional "diffusion" process -- early enthusiasts first, late adopters at the end.

It's relatively easy to get good revenue from the early adopters. They seek out innovations like yours, and are willing to pay top dollar for it. As the market for a computer system matures, the early adopters get used up, and the company starts selling to middle adopters who are more price-sensitive. In response to this, the company cuts prices, which results in a big jump in sales. Total revenue goes up, and usually overall profits as well. Everybody in the company feels good.

Time passes, and that middle portion of the market gets consumed. Eventually demand growth starts to drop, and you make another price cut. Sales go up again, sometimes a lot. With revenue rising, you and your investors talk proudly about the benefits of reaching the "mainstream" market.

At Apple, when we hit this point we called our low-cost products the Macintosh Classic and Macintosh LC. At Palm, it was the M100.

What you don't realize at this point is that you're not "reaching the mainstream," you're actually consuming the late adopters. Unfortunately, it's very difficult to tell when you're selling to the late adopters. They don't wear signs. Companies tend to assume that because the adoption curve is drawn as a smooth-sided bell, your demand will tail off at the end as gradually as it built up in the beginning. But that isn't how it works. At the start, you are slowly building up momentum from a base of nothing. That takes years. But by the time you saturate the market you have built up huge sales momentum. You have a strong brand, you have advertising, you have a big distribution channel. You'll gulp through the late adopters really rapidly. The result is that sales continue to grow until they drop suddenly, like a sprinter running off the edge of a cliff.

The chart below illustrates how the process works:



Until you get close to the end, your revenue keeps rising, enabling you to tell yourself that the business is still in good shape. But eventually you reach the dregs of the market, and sales will flatten out, or maybe even start to drop. You cut prices again, but this time they don't increase demand because there are no latent customers left. All the cuts do is reduce further the revenue you get from selling upgrades to your installed base. The combination of price cuts and declining sales produces a surprisingly rapid drop in revenue and profits. If you want to make a profit (which your investors demand), your only choice is to make massive cuts in expenses. Those cuts usually end up eliminating the risky new product ideas that are your only hope of re-igniting demand.

At Apple I called this the platform "death spiral" because once you get into it, the expense cuts and sales declines reinforce each other. It's almost impossible to reverse the process, unless you're Steve Jobs and you get very lucky.

The best way to survive is to stay away from the cliff edge in the first place. But that means you need to be hyper-attentive to small changes in sales growth and gross margins. Which brings us back to RIM's situation.


Dissecting RIM's financials

At the top level, RIM's financials look utterly fantastic:

RIM Revenue and Profit

Fiscal years. Dollars in millions.

Since fiscal 2003 (when it turned profitable), RIM has grown from $500m revenue to over $15 billion. That's 30X growth in eight years. The BlackBerry subscriber base has grown from 500,000 people to about 50 million. Throughout that period, the company's net income has hovered at between 15% and 22% of revenue.

This is one of the most impressive business success stories of the last decade, and most CEOs in any industry would kill to have that sort of results. Considering how much turmoil there is in the smartphone market, RIM's senior managers must feel extremely proud of their success, and more than a bit bewildered that people keep criticizing them.

And that's exactly my point. Looking at the high-level financials can lull you into a false sense of security if you're managing a computing platform. You have to really dig to find the warning signs. That's especially hard to do in RIM's case because the company has several different sources of revenue: device sales, service revenue, and enterprise server revenue. The overall results they report are mashup of all three revenue streams. To understand what's really happening, you have to tease them apart. Here are some key data points.

First, let's look at the total number of BlackBerry subscribers:

Total BlackBerry Subscribers

RIM's fiscal quarters. Units in millions.

Pretty impressive growth. But remember, we're looking for subtle signs of saturation. Let's look at the number of subscribers added per quarter...

Net New Subscribers Per Quarter

RIM's fiscal quarters. Units in millions.

This is where you get the first little twinge of discomfort. Until a year ago, the rate of growth of BlackBerry subscribers was itself increasing every quarter. In other words, RIM added more new subscribers each quarter than it had added in the previous quarter. But for the last four quarters, RIM's subscriber growth has plateaued at around 4.7 million net new subscribers a quarter. The company's still growing, but it looks like the rate of growth may be flattening. That might imply the beginning of saturation.

Next let's look at net new subscribers as a percent of total BlackBerry units sold.

New Subscribers Added Per Unit Sold

RIM's fiscal quarters.

This one's a little disquieting as well. Five years ago, RIM was getting .7 new subscribers for every BlackBerry sold. In other words, most of its sales were to new users. Today, RIM is getting .37 more subscribers per BlackBerry sold, and that figure is at an all-time low. To put it another way, RIM now has to sell more than two and a half devices to get one more subscriber. Either RIM is selling most of its units to its installed base, or it is having to bring in a lot of new customers to replace those who are leaving for other devices. My guess is it's a mix of both.

If you look closely at that chart, you'll notice a curious bump in the line at Q4 of 2009. The percentage of new subscribers went back up all of a sudden. What did RIM do to produce that growth? A look at device gross margins tells you.

Device Gross Margin Percentage

RIM's fiscal quarters.

[Note: RIM does not report separately the gross margins it gets in the devices business, so I had to estimate this number using the company's hardware revenue and the total cost of goods sold across all of its businesses. Most of RIM's total COGS are hardware expenses, but they also include some server costs associated with providing e-mail service. That means my calculation understates RIM's device margins by a bit. But as the company grows, server costs should go down as a percent of overall costs (because you get better economies of scale). So apparent hardware margins should be going up over time. That makes the fact that they're declining all the more ominous.]

RIM increased new subscriptions by substantially cutting the profit it makes per device. What happened is that the BlackBerry Bold, Storm, and Curve all came to market with increased features, replacing older devices that were much cheaper to build. That should have produced only a one-time hit to margins, though -- they should have gone back up as component costs on the new phones declined. Instead, margins have stayed down ever since. Why? Let's look at the what RIM gets paid for each BlackBerry it sells:

RIM's Revenue Per BlackBerry Device Sold

RIM's fiscal quarters. Hardware revenue per unit sold.

This chart shows the average price the carriers pay to RIM per phone, prior to the discount they put on the phone when you sign up for a contract. The line looks pretty flat, and in fact through the middle of fiscal 2009 RIM's price per unit was very stable. Then in Q3, with the introduction of the new devices, RIM gets a temporary spike in revenue per unit. The new phones are selling at a premium. But that goes away in the next two quarters, and then about a year ago, RIM started cutting prices. Today the company gets about $50 less per unit than it usually did in the past.


When you assemble the big picture, it looks like this: To keep growing, RIM has been forced to reduce margins and prices. Despite the cuts, the rate of growth in subscribers appears to have flattened out. And more and more of the sales mix is going to existing users, or user replacement, rather than new users. RIM starts to look like a company that's working harder and harder just to stay in one place.

The picture gets more ominous when you look at some recent surveys of smartphone user satisfaction. In JD Power's 2010 smartphone satisfaction survey, BlackBerry finished near the bottom, with below average ratings in every category except battery life (link). Just three years earlier, as the iPhone was coming to market, BlackBerry had the highest satisfaction ratings in the industry (link). I don't love JD Power's methodology (for reasons that are too long to explain here), but no way should RIM's rating be declining like that.

The low satisfaction is starting to threaten RIM's future sales. In June of this year, Nielsen released some tidbits from a survey of the future purchasing plans of smartphone users (link):

OS Preferences of People Planning to Replace Their Smartphones


The chart shows US smartphone users who were thinking about buying a new device in Q1 of 2010. More than half of the BlackBerry users considering a new smartphone were leaning toward a different OS.

If I were working at RIM, that chart would scare the crap out of me.

The company is by no means dead, but the symptoms of a stalling platform are definitely there. If you work at RIM and are reading this, here's what I want you to understand: Your company's at risk. Your great financials mask that risk, and give you lots of logical-sounding reasons to avoid making the changes that need to be made. RIM is like a 53-year-old man who has high blood pressure and cholesterol but tells himself that he's OK because he can still run a half-marathon. You are indeed fine, right up until you have the heart attack. Then it's too late.

Here's what you need to do:


How to avoid the cliff

To keep a platform viable, you need to focus on two tasks: Keep the customer base loyal, and add adjacent product categories.

Keeping the base loyal. This is transcendently important to a platform company. As your market matures, more and more of your sales will come from replacement devices sold to the installed base. You'll also depend more and more on a base of developers who add value to your products. If you can keep these people happy, you'll have a steady stream of replacement sales that you can build on. It won't be enough to produce the growth that your investors want, but it'll be a great foundation.

On the other hand, if these customers and developers drift away, there's virtually no way you can grow something else fast enough to offset their loss. The trick here is that the supporter base for a computing platform is like a herd of cattle. They move as a group. When the herd is contented, it tends to stay in one place. But if the herd gets restless, even a small disturbance can cause a stampede in which they all run away at once.

For example, this is the factor that HP failed to consider when it bought Palm. The Pre's small base of users and developers was a classic group of restless cattle. When HP bought the company, the first priority should have been to calm those people by promising a renewed commitment to the Pre and follow-on products. Even if HP didn't see smartphones as its long-term future, it should have focused on keeping the developers and users loyal until it had something else for them to buy and develop for. Instead, HP CEO Mark Hurd more or less killed the product line a day after the purchase (link):

HP won't "spend billions of dollars trying to go into the smartphone business; that doesn’t in any way make any sense....We didn’t buy Palm to be in the smartphone business. And I tell people that, but it doesn’t seem to resonate well. We bought it for the IP."

Ooookay, so if you're a Pre customer, do you buy again? Do you tell your friends to buy? If you're a WebOS developer, do you keep writing code while you wait for HP to decide what it'll do with that "IP" it bought?

The answer is, you run for the exit as fast as you can. HP bought a company for a billion dollars and then immediately trashed it.

Back to RIM. Your cattle are restless. If you don't believe me, go look at that Nielsen chart again. Your goal is to keep the cattle content, by feeding them a steady diet of delightful new products that deepen their commitment to the platform. RIM's record in this area is very mixed. There have been a lot of new BlackBerry products announced in the last few years, but most of them seem to be focused on copying things Apple has done rather than finding new ways to delight BlackBerry customers.

Some of the Apple imitation is probably necessary. Apple has turned a lot of features into checkoff items that are now expected from any smartphone -- a better browser, for example. If RIM didn't eventually add those features, the herd would at some point stampede away for sure.

But what I haven't seen from RIM is a vision for deepening the special features that made people bond with BlackBerry in the first place. The personal communication functionality of BlackBerry is about the same now as it was five years ago. Why in God's name was Apple the first North American smartphone company to really push video calling? As the communication beast, RIM should have led that years ago.

Instead, the latest BlackBerry devices feel a bit like an overbuilt ice cream sundae -- the original BlackBerry functionality is at the base more or less unchanged, and a bunch of gooey media toppings have been dumped on top of it. I see sprinkles, fudge, marshmallow, pineapple, whipped cream, a cherry, and a few gummy bears, but no significant improvement to the old, dried-out ice cream at the bottom of the bowl.

Inevitably, RIM can't implement those new media toppings as cleanly and elegantly as Apple did, because its platform wasn't designed for that. So what you get is a BlackBerry that endorses Apple's design direction but fails to fully deliver on it. Maybe that helps keep some BlackBerry users from leaving instantly, but it doesn't give them a positive reason to stay. Rather than playing to win, RIM is playing not to lose, and doing it poorly.

This is especially scary because RIM depends much more than Apple on mobile operators to help drive demand for its products (if you're in the US, ask yourself how many Verizon and AT&T ads you have seen for BlackBerry, versus how many ads you've seen from RIM itself). The operators follow customer interest, they don't create it. If they get the sense that BlackBerry users want to switch, they will be only too happy to facilitate that switch -- especially since they don't have to share service revenue with Android vendors the way they do with RIM.

What RIM should do. RIM need a product vision identifying a few new differentiators for BlackBerry that will resonate well with the busy knowledge workers who are at the core of its installed base. There should be no more than three of these features (because customers can't remember more than three), and they should not be copies of things that Apple is already implementing. RIM should focus on building them deeply into the product, so they are very well integrated with the rest of the device. My nominees are meeting planning, conferencing, and live document sharing.

Other smartphone companies will eventually copy these features, so RIM needs to create a pipeline of development in which it'll bring out another 2-3 new differentiators every 24 months.


Adding adjacent categories. Settling down the installed base is not enough. It's an enormous task, but all it'll do is stabilize the business. It won't produce the growth that investors expect. To get that, RIM needs to eventually add new types of product that expand its market.

Apple is a master at this process. When Steve Jobs came back, Apple had only the Macintosh. It refreshed that product line, securing the customer base. Then it added the iPod, iPhone, and iPad. Each of them targeted Apple's core market of creative, entertainment-loving people, and each of them leveraged Apple's existing software and hardware. This overlap made the new products relatively inexpensive to develop and market -- they could be sold to the same sorts of people, through the same channels, and they reused a lot of technology. Each new product line also tended to drag a few more customers back to the earlier products, so they reinforced each other.

These new products enabled Apple to grow its revenue rapidly without putting pressure on the Macintosh to carry the whole load. Apple could invest enough in the Mac to keep it a stable and very profitable business, while the new products produced the topline growth.

To understand how wickedly efficient Apple's business model is, take a glance at the R&D budgets of RIM and Apple.

Quarterly R&D Spending of Apple and RIM

R&D spending in most recent four quarters. Dollars in millions.

Although Apple has about three times the revenue, RIM's R&D spending is about two-thirds of Apple's. With just a third more money, Apple produces the Macintosh, iPod, iPhone, iPad, Apple TV, iTunes, App Store, custom microprocessors, and a suite of mobile services. RIM is producing a bunch of minute variations on a family of phones, an e-mail server, a new OS, and a suite of mobile services that also has to be individually interfaced to each operator. RIM puts much of its effort into infrastructure that has little or no impact on features that users can see and value.

Now RIM wants to add more product lines. Its first effort will be the PlayBook tablet in 2011. This will be a decisive test of RIM's ability to grow in the future, and so far the signs are worrisome. Unlike Apple's first announcement of the iPhone, the PlayBook announcement didn't show much functionality that looked fundamentally new compared to the competition (in fact, the interface looked to me a lot like a warmed-over version of Palm's WebOS). The pitch was almost all about enabling technology rather than user benefits. When you find yourself talking up the dual-core processor and symmetric multiprocessing in a consumer product, it's a sign of a serious lack of differentiation.

I'd be more hopeful about the prospects for the PlayBook if RIM had done a better job of evolving its BlackBerry products recently. Unfortunately, RIM's latest innovation flagship is the BlackBerry Torch, an overproduced heap of half-integrated features that ranks as one of the most disappointing mobile devices I've seen from a major manufacturer in years.

Yeah, I know there are some people who like the Torch. But there were also people who thought MS-DOS was easy to use.

Burned by the Torch. I recently bought a BlackBerry Torch for my wife, who needed a smartphone to manage work e-mail. We both wanted her to have something simple to use, with a keyboard that made her comfortable. She liked the Torch in the store, so we bought it for her.

The device was a usage nightmare. Even after years of working with touch screen technology, RIM hasn't managed to evolve its user interface to the point where the touch pad and the touch screen work together smoothly. Some functions are easier to perform on touch screen, and others are easier on touch pad, and so the whole interface feels muddled. But by far the more disappointing problem was that the huge number of new applications just added to the phone do not work together properly. I can't even list all of the problems we both had figuring out how to use them, but one vivid example should suffice. My wife entered a lot of contacts directly into the device's contacts app, but didn't bother to include the area code in the phone numbers. The BlackBerry didn't warn her about this.

Then she went to the messaging app and tried to send a text message to our daughter. When she tried to send the message, the app reported that it could not send to a contact without an area code. So she went back to the contacts app and added area codes.

Then she went back to the messaging app and again tried to send a text message. The messaging app reported once again that it could not send a message without an area code. It had apparently made a copy of the data from the contacts app when it was first used, and would not update the copy. So my wife then edited the contact information from within the contacts app (it lets you do that). But when she tried to save the updated contact, the phone responded that it could not accept external changes to the contacts, and deleted the change.

Next, she tried to send a message by typing our daughter's phone number, including area code, directly into the To: portion of a new message. When she tried to send that message, the messaging application did a lookup on its contacts database, changed the phone number back to the version without an area code, and then reported that it could not send the message because the phone number lacked an area code.

Using the BlackBerry Torch is like being trapped in a real-life version of "Waiting for Godot."

I've seen this sort of incoherent design before. It happens when you have several teams working on parts of the device, and you haven't done proper planning up front to make sure the apps will work together well. It is a symptom of an out-of-control development process. The fact that this happened on RIM's flagship product is deeply disturbing. If the same incompetent processes are applied to the PlayBook -- a much more complex product with a lot of new functionality -- it is almost certain to fail.

By the way, we returned the phone.

What RIM should do. To fix this problem, RIM needs to create rigorous up-front planning processes in its software team, with someone who has dictatorial power placed in charge of overall software integration for a device or OS release. Also, the product manager needs to be empowered (actually required) to delay shipment of a product if it's not right. I'm sure someone at RIM knew about the problems in the Torch. The fact that the company went ahead and shipped it is almost as disturbing as the problems themselves.


Rescuing RIM

To sum up, RIM is at risk because its natural market is saturating and many of its customers are considering a switch to other platforms. The company may be able to bumble along in this situation for years before the problem comes to a head, but once a migration away from BlackBerry starts it would be almost impossible to stop. So if the company wants to ensure its survival, it needs to act now. Two steps are needed:

--The BlackBerry line needs to be given a several fundamental, visionary innovations that will give its core customers a reason to stay; and

--The company needs to change its development process to guarantee proper design and integration in all of its products.

Given the time needed to create a new product, these changes will take at least 18 months to bear fruit, probably more like two years. During that time RIM will remain at risk of a platform collapse. What's worse, the company's engineers already have their hands full copying iPhone features, customizing phones for a huge range of operators, and simultaneously creating a new operating system and developing a new version of the current one. The sort of changes I'm suggesting would disrupt that work, forcing the cancellation of some projects and slips in the schedule for others. They would make the problem worse before they make it better. In the meantime, the company would lose serious revenue, and might even miss earnings projections for a quarter or two. The stock's value would be trashed, and there would be calls for firing management.

As the founders of the company, Jim Balsillie and Mike Lazaridis could probably pull this off without losing their jobs. And I know they have the courage to make big changes. But I doubt they can see the need, or especially the urgency. Their current processes and business practices got them to $15 billion in revenue; why should they change now? It's much more prudent to focus on making the numbers for next quarter.

That's probably just what RIM will do. And if it does, that's why the company will probably eventually fail.

==========

[Edit: Since this post is still getting a lot of traffic, I wanted to let you know that I've posted a look at RIM's Q3 FY 2011 financials, with  updated charts and a deeper look at international sales.  I think the situation is both better and worse than I originally believed (link).  And you can see my take on their June 2011 layoff announcement here.]

Four questions about the Microsoft-Nokia alliance

The Microsoft-Nokia alliance turned out to be a lot more interesting than the pre-announcement rumors made it out to be. Rather than just a bundling deal for mobile Office, the press release says they'll also be co-developing "a range of new user experiences" for Nokia phones, aimed at enterprises. Those will include mobile Office, enterprise IM and conferencing, access to portals built on SharePoint, and device management.

Of those items, the IM and conferencing ideas sound the most promising to me. Office, as I explained in my last post, is not much of a purchase-driver on mobile phones. And I think Microsoft would have needed to provide Nokia compatibility in its mobile portal and device management products anyway.

I understand the logic behind the alliance. Nokia has never been able to get much traction for its e-series business phones, and Microsoft hasn't been able to kick RIM out of enterprise. So if they get together, maybe they can make progress. But it's easy to make a sweeping corporate alliance announcement, and very hard to make it actually work, especially when the partners are as big and high-ego as Microsoft and Nokia. This alliance will live or die based on execution, and on a lot of details that we don't know about yet.

Here are four questions I'd love to see answered:


What specifically are those "new user experiences"?

If Nokia and Microsoft can come up with some truly useful functionality that RIM can't copy, they might be able to win share. But the emphasis in the press release on enterprise mobility worries me. The core users for RIM are communication-hungry professionals. If you want to eat away at RIM's base, you need to excite those communicator users, and I'm not sure if either company has the right ideas to do that. As Microsoft has already proven, pleasing IT managers won't drive a ton of mobile phone purchases.


Will Microsoft really follow through?

Microsoft has been hinting for the last decade that it was were willing to decouple mobile Office from the operating system, but they never had the courage to follow through. Now they have announced something that sounds pretty definitive, but the real test will be whether they put their best engineers on the Nokia products. If Microsoft assigns its C players to the alliance, or tries to make its Nokia products inferior to their Windows Mobile versions, the alliance won't go anywhere interesting.


What does this do to Microsoft's relationships with other handset companies?

Imagine for a moment that you are the CEO of Samsung. Actually, imagine that for several moments. You aren't exclusive with Microsoft, but you've done a lot of phones with Windows Mobile on them. Now all of a sudden Microsoft makes a deal with a company that you think of as the Antichrist.

How do you feel about that?

I can tell you that Samsung is not the most trusting and nurturing company to do business with even in the best of times. So I think you make two phone calls. The first is to Steve Ballmer, asking very pointedly if you can get the same software as Nokia, on the same terms, at the same time. If you don't like the answer to that question, your next call is to Google, regarding increasing your range of Android phones.

Maybe the reality is that Microsoft has given up on Windows Mobile and doesn't care what Samsung does. But that itself would be interesting news.

I would love to know how those phone calls went today.


What does RIM do about this?

It has been putting a lot of effort into Apple-competitive features like multimedia and a software store. Does it have enough bandwidth to also fight Nokia-Microsoft? What happens to its core business if Microsoft and Nokia do come up with some cool functions that RIM doesn't have? Are there any partners that could be a counterweight to Microsoft and Nokia? If I'm working at RIM, I start to think about alliances with companies like Oracle and SAP. And I wonder if Google is interested in doing some enterprise work together.

Symbian: Evolving toward open

It's fascinating to watch the evolution as Symbian remakes itself from a traditional OS company into an open-source foundation. They've made enormous organizational changes (most of the management team is new), but the biggest change of all seems to be in mindset. A nonprofit foundation has a very different set of motivations and priorities than an OS corporation does. I get the feeling that the Symbian folks are still figuring out what that means. It's an interesting case study, but also a good example for companies looking to work with open source.

Symbian recently held a dinner with developers and bloggers in Silicon Valley, and I got to see some of those differences in action.

The first difference was the dinner itself. About six months ago, Symbian and Nokia held a conference and blogger dinner in San Francisco (link). It was interesting but pretty standard -- a day of presentations, followed by dinner at a large, long table at which Symbian and Nokia employees talked to us about what they're doing and how excited they are. The emphasis was on them informing us.

The recent dinner was structured very differently. The attendees were mostly developers rather than bloggers, and we were seated at smaller, circular tables that made conversation easier. They talked about their plans at the start, but most of the evening was devoted to asking our opinions, and they had a note-taker at each table. This had the effect of not just collecting feedback from us, but forcing us to notice that they were listening. That's important to any company, but it is critical to a nonprofit foundation that relies on others to do its OS programming. And it's essential for a company like Symbian, which has been ignored by most Silicon Valley developers.

So that's the first lesson about open source. The task of marketing is no longer to convince people how smart you are, it's to convince people how wonderful you are to work with. Instead of you as a performer and developers as the audience, the situation is flipped -- the developers are the center of attention and you're their most ardent fan.

It's an interesting contrast to Apple's relationship with developers, isn't it? It'll be fun to see how this evolves over time.

Here are my notes on the subjects Symbian discussed with us, along with some comments from me:


It takes time

Symbian said its goal is to have a lot of developers on the platform and making money, but that can't be achieved in three months. "In three years time," is what I wrote in my notes. That is simultaneously very honest and a little scary. It's honest because a foundation with its limited resources, working through phone companies with 24 month release cycles, simply can't make anything happen quickly. It's scary because competitors like Apple and RIM have so much momentum, and can act quickly. Still, in the current overused catchphrase of sports broadcasting, is what it is. An open-source company, based on trust, simply cannot afford to risk that trust by hyping or overpromising.

Speaking of Apple and RIM, Symbian made clear that it considers its adversary to be single-company ecosystems like Apple, RIM, and Microsoft. I didn't think to ask if Nokia's Ovi fits in that category, but that probably wouldn't have been a polite question anyway. Symbian also took some swipes at Google, citing the "lock in" deals they have supposedly made with some operators.

You get the feeling that Symbian is intensely annoyed by Google. It's one thing for a mobile phone newcomer like Apple to create a successful device; it's quite another for an Internet company to step into the OS business and take away Motorola as a Symbian licensee. I think one of Symbian's arguments against Android is going to be that Symbian is more properly and thoroughly open.

The question is whether anyone cares about that. Although the details of open source governance are intensely important to the community of free software advocates, I think that for most developers and handset companies the only "open" that they care about translates as, "open to me making a lot of money without someone else getting in the way." Thus the success of the Apple Store, even though Apple is one of the most proprietary companies in computing. Symbian's measure of success with developers will be whether it can help them get rich -- and I think the company knows that.


Licensees and devices

One step in helping developers make money is to get more devices with Symbian OS on them. Symbian said phones are coming from Chinese network equipment conglomerates Huawei and ZTE. They also said non- phone devices are in the works.

Licensees will be especially important if Nokia, as rumored, creates a line of phones based on its Maemo Linux platform. Lately some industry people I trust have talked about those phones as a sure thing rather than speculation, and analyst Richard Windsor is predicting big challenges for Symbian as a result:

"It seems that the clock is ticking for Symbian as technological limitations could lead to it being replaced in some high-end devices.... I suspect that the reality is that Symbian is not good enough for some of the functionality Nokia has planned over the medium term leaving Nokia with no choice but to move on."
Source: Richard Windsor, Industry Specialist, Nomura Securities

David Wood at Symbian responded that people should view Maemo as just Nokia's insurance in case something goes wrong with Symbian (link). But the point remains that Nokia is Symbian's main backer today. That is a strength, but also a big vulnerability. If Symbian wants developers to invest in it, I think it needs to demonstrate the ability to attract a more diverse set of strong supporters.


App Store envy

Another way to help developers is to, well, help them directly. Symbian said it's planning something tentatively called "Symbian Arena," in which it will select 100 Symbian applications to be featured in the application stores on Symbian phones. Symbian will promote the applications and perform other functions equivalent to a book publisher, including possibly giving the app author an advance on royalties.

The first five applications will be chosen by July, and featured on at least three Symbian smartphones (the Nokia N97, and phones from Samsung and Sony Ericsson).

The most interesting aspect of the program is that Symbian said its goal is to take no cut at all from app revenue for its services. Obviously that means the program can't scale to thousands of applications -- Symbian can't afford it. They said they'd like to evolve it into a much broader program in which they would provide publishing services for thousands of apps at cost. My guess is they could push the revenue cut down to well under 10% in that case, compared to the 30% Apple takes today.

It isn't clear to me if Symbian will produce the applications store itself, or work through others, or both. If it works through other stores, those stores might take a revenue cut of their own. But still, from a developer point of view it's nice to see an OS vendor trying to lower the cost of business for creating apps.

It's been interesting to see how many of the Palm Pre reviews this week have said that the iPhone application base is the main reason to prefer an iPhone over a Pre. I'm not sure how much purchase influence apps actually have -- at Palm, we had ten times the applications of Pocket PC, but they didn't seem to do anything for our sales. (On the other hand, Palm never had the wisdom and courage to advertise its apps base the way Apple has.)

--"Compared to the iPhone, the real missing pieces are those thousands of applications available on the App Store." Wired
--"Developer courting still seems like an area where Palm needs work. They've got a great OS to work with, but they have yet to really extend a hand to a wide selection of developers or help explain how working in webOS will be beneficial to their business. The platform is nothing without the support of creative and active partners." Engadget
--"The Pre's biggest disadvantage is its app store, the App Catalog. At launch, it has only about a dozen apps, compared with over 40,000 for the iPhone, and thousands each for the G1 and the modern BlackBerry models....It is thoughtfully designed, works well and could give the iPhone and BlackBerry strong competition -- but only if it fixes its app store and can attract third-party developers." Walt Mossberg

Anyway, if applications are the new competitive frontier between smart phones, mobile OS vendors should be competing to see who can do the most to improve life for developers. This is another area where Symbian's motives, as a foundation, differ from a traditional OS company. If you're trying to make money from an OS, harvesting some revenue from developers make sense. But as a nonprofit foundation, draining the revenue streams from your competitors is one of your best competitive weapons. Symbian has little reason to try to make a profit from developers, and a lot of reasons not to.


Driving Web standards

That idea came up again when we talked about web applications for mobile. As I've said before, I think the most valuable thing that could happen for mobile developers would be the creation of a universal runtime layer for mobile web apps -- software that would let them write an app once, host it online, and run it unmodified on any mobile OS. No commercial OS companies want to support that because it would commoditize their businesses and drain their revenues. But if Symbian's primary weapon is to remove revenue from other OS companies, a universal Web runtime might be the best way to do it. I asked them about this, and they said they're planning to use web standards in the OS "like Pre," and said they're interested in supporting universal web runtimes.

I'm intensely interested in seeing how the runtime situation develops. I think Symbian and Google are the only major mobile players with an interest in making it work, and Google so far hasn't been an effective leader in that space. I think Symbian might be able to pull it off, and become a major player in the rise of the metaplatform. But it'll take an active effort by them, such as choosing a runtime, building it into every copy Symbian OS, and making it available for other platforms. Passive endorsement of something is not enough to make a difference.


Other tidbits

Symbian said it's going to "radically simplify" the Symbian Signed app certification program, which may be very welcome news to developers, depending on the details. Many developers today complain bitterly about the cost and inconvenience of the signing program, and unless it's fixed it'll outweigh any of the benefits from Symbian Arena.

The QT software layer that Nokia bought as part of its Trolltech acquisition will be built into Symbian OS in the second half of 2010. I had been wondering if it would be an option or a standard part of the OS; apparently it'll be a standard.

Symbian plans to bring its developer conference to San Francisco in 2010, after which it will rotate to various locations around the world. This is part of an effort to increase Symbian's visibility in the US market. The company is creating a large office here, including two members of its exec staff. That makes sense for recruiting web developers, but it will be hard for the company to have a big impact in the US unless it gets a licensee who can market effectively here. In that vein, it must have been frustrating for everyone involved when Nokia announced the shipment of the N97 and it came in a distant third in coverage in the US (after the Palm Pre and the iPhone rumors).


What it all means

There are a lot of things that could kill the Symbian experiment:
--Nokia could decommit from the OS (or just waver long enough that developers lose faith).
--Symbian licensees could fail to produce interesting devices that keep pace with Apples, RIMs, and Palms of the world.
--Android could eat up all the attention of open source developers, leaving Symbian to wither technologically.
--The market might evolve faster than a foundation yoked to handset companies can adjust.

But still the Symbian foundation is worth watching. It has a different set of goals than every other mobile OS company out there, goals that potentially can align more closely with the interests of third party developers. It's still up to Symbian to deliver on that potential, but the company has an opportunity to challenge the mobile market in ways that it couldn't as a traditional company.

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Prof. Joel West of San Jose State was also at the Symbian meeting and posted some interesting comments about it. You can read them here.

Full disclosure: My employer, Rubicon Consulting, did a consulting project for Symbian a year ago. None of the analysis conducted in that project was used in this post. We currently have no ongoing, or planned, business relationship with Symbian.

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.