Why smartphones are a big deal (Part 2)

[This is a continuation of my post on Why Smartphones are a Big Deal (Part 1)]

Last time, I laid out four reasons why smartphones are a lot more than just phones for rich snobs:

1. It’s the software, stupid
2. Look ma, no <insert other device here>
3. Putting the carriers in their place
4. Contextuality

My last post focused on #1 and #2, mainly that (#1) software opens up a whole new world of money and possibility for smartphones that “regular” phones can’t replicate and (#2) that the combination of smartphones being able to do the things that many other devices can and phones being something that you carry around with you all day spells bad news for GPS makers, MP3 player companies, digital camera companies, and a lot of other device categories.

This time, I’ll focus on #3 and #4.

III. Putting the carriers in their place

Throughout most of the history of the phone industry, the carriers were the dominant power. Sure, enormous phone companies like Nokia, Samsung, and Motorola had some clout, but at the end of the day, especially in the US, everybody felt the crushing influence of the major wireless carriers.

In the US, the carriers regulated access to phones with subsidies. They controlled which functions were allowed. They controlled how many texts and phone calls you were able to make. When they did let you access the internet, they exerted strong influence on which websites you had access to and which ringtones/wallpapers/music you could download. In short, they managed the business to minimize costs and risks, and they did it because their government-granted monopolies (over the right to use wireless spectrum) and already-built networks made it impossible  for a new guy to enter the market.

But this sorry state of affairs has already started to change with the advent of the smartphone. RIM’s Blackberry had started to affect the balance of power, but Apple’s iPhone really shook things up – precisely because users started demanding more than just a wireless service plan – they wanted a particular operating system with a particular internet experience and a particular set of applications – and, oh, it’s on AT&T? That’s not important, tell me more about the Apple part of it!

What’s more, the iPhone’s commercial success accelerated the change in consumer appetites. Smartphone users were now picking a wireless service provider not because of coverage or the cost of service or the special carrier-branded applications  – that was all now secondary to the availability of the phone they wanted and what sort of applications and internet experience they could get over that phone. And much to the carriers’ dismay, the wireless carrier was becoming less like the gatekeeper who got to charge crazy prices because he/she controlled the keys to the walled garden and more like the dumb pipe that people connected to the web on their iPhone with.

Now, it would be an exaggeration to say that the carriers will necessarily turn into the “dumb pipes” that today’s internet service providers are (remember when everyone in the US used AOL?) as these large carriers are still largely immune to competitors. But, there are signs that the carriers are adapting to their new role. The once ultra-closed Verizon now allows Palm WebOS and Google Android devices to roam free on its network as a consequence of AT&T and T-Mobile offering devices from Apple and Google’s partners, respectively, and has even agreed to allow VOIP applications like Skype access to its network, something which jeopardizes their former core voice revenue stream.

As for the carriers, as they begin to see their influence slip over basic phone experience considerations, they will likely shift their focus to finding ways to better monetize all the traffic that is pouring through their networks. Whether this means finding a way to get a cut of the ad/virtual good/eCommerce revenue that’s flowing through or shifting how they charge for network access away from unlimited/“all you can eat” plans is unclear, but it will be interesting to see how this ecosystem evolves.

IV. Contextuality

There is no better price than the amazingly low price of free. And, in my humble opinion, it is that amazingly low price of free which has enabled web services to have such a high rate of adoption. Ask yourself, would services like Facebook and Google have grown nearly as fast without being free to use?

How does one provide compelling value to users for free? Before the age of the internet, the answer to that age-old question was simple: you either got a nice government subsidy, or you just didn’t. Thankfully, the advent of the internet allowed for an entirely new business model: providing services for free and still making a decent profit by using ads. While over-hyping of this business model led to the dot com crash in 2001 as countless websites found it pretty difficult to monetize their sites purely with ads, services like Google survived because they found that they could actually increase the value of the advertising on their pages not only because they had a ton of traffic, but because they could use the content on the page to find ads which visitors had a significantly higher probability of caring about.

The idea that context could be used to increase ad conversion rates (the percent of people who see an ad and actually end up buying) has spawned a whole new world of web startups and technologies which aim to find new ways to mine context to provide better ad targeting. Facebook is one such example of the use of social context (who your friends are, what your interests are, what your friends’ interests are) to serve more targeted ads.

So, where do smartphones fit in? There are two ways in which smartphones completely change the context-to-advertising dynamic:

• Location-based services: Your phone is a device which not only has a processor which can run software, but is also likely to have GPS built-in, and is something which you carry on your person at all hours of the day. What this means is that the phone not only know what apps/websites you’re using, it also knows where you are and if you’re on a vehicle (based on how fast you are moving) when you’re using them. If that doesn’t let a merchant figure out a way to send you a very relevant ad, I don’t know what will. The Yowza iPhone application is an example of how this might shape out in the future, where you can search for mobile coupons for local stores all on your phone.
• Augmented reality: In the same way that the GPS lets mobile applications do location-based services, the camera, compass, and GPS in a mobile phone lets mobile applications do something called augmented reality. The concept behind augmented reality (AR) is that, in the real world, you and I are only limited by what our five senses can perceive. If I see an ad for a book, I can only perceive what is on the advertisement. I don’t necessarily know much about how much it costs on Amazon.com or what my friends on Facebook have said about it. Of course, with a mobile phone, I could look up those things on the internet, but AR takes this a step further. Instead of merely looking something up on the internet, AR will actually overlay content and information on top of what you are seeing on your phone screen. One example of this is the ShopSavvy application for Android which allows you to scan product barcodes to find product review information and even information on pricing from online and other local stores! Google has taken this a step further with Google Goggles which can recognize pictures of landmarks, books, and even bottles of wine! For an advertiser or a store, the ability to embed additional content through AR technology is the ultimate in providing context but only to those people who want it. Forget finding the right balance between putting too much or too little information on an ad, use AR so that only the people who are interested will get the extra information.

The result of all four of these factors? If you assume that a phone is only a calling device, you’re flat out wrong. And if you think a phone is just another device for accessing the internet and playing goofy little games, you’re also wrong. The smartphone will, in this blogger’s humble opinion, dramatically change the technology landscape, and the smart money is on the companies and startups and venture capitalists who recognize that and act on it.

(Image credit) (Image credit) (Image credit)

Why smartphones are a big deal (Part 1)

A cab driver the other day went off on me with a rant about how new smartphone users were all smug, arrogant gadget snobs for using phones that did more than just make phone calls. “Why you gotta need more than just the phone?”, he asked.

While he was probably right on the money with the “smug”, “arrogant”, and “snob” part of the description of smartphone users (at least it accurately describes yours truly), I do think he’s ignoring a lot of the important changes which the smartphone revolution has made in the technology industry and, consequently, why so many of the industry’s venture capitalists and technology companies are investing so heavily in this direction. This post will be the first of two posts looking at what I think are the four big impacts of smartphones like the Blackberry and the iPhone on the broader technology landscape:

1. It’s the software, stupid
2. Look ma, no <insert other device here>
3. Putting the carriers in their place
4. Contextuality

I. It’s the software, stupid!

You can find possibly the greatest impact of the smartphone revolution in the very definition of smartphone: phones which can run rich operating systems and actual applications. As my belligerent cab-driver pointed out, the cellular phone revolution was originally about being able to talk to other people on the go. People bought phones based on network coverage, call quality, the weight of a phone, and other concerns primarily motivated by call usability.

Smartphones, however, change that. Instead of just making phone calls, they also do plenty of other things. While a lot of consumers focus their attention on how their phones now have touchscreens, built-in cameras, GPS, and motion-sensors, the magic change that I see is the ability to actually run programs.

Why do I say this software thing more significant than the other features which have made their ways on to the phone? There are a number of reasons for this, but the big idea is that the ability to run software makes smartphones look like mobile computers. We have seen this pan out in a number of ways:

• The potential uses for a mobile phone have exploded overnight. Whereas previously, they were pretty much limited to making phone calls, sending text messages/emails, playing music, and taking pictures, now they can be used to do things like play games, look up information, and even be used by doctors to help treat and diagnose patients. In the same way that a computer’s usefulness extends beyond what a manufacturer like Dell or HP or Apple have built into the hardware because of software, software opens up new possibilities for mobile phones in ways which we are only beginning to see.
• Phones can now be “updated”. Before, phones were simply replaced when they became outdated. Now, some users expect that a phone that they buy will be maintained even after new models are released. Case in point: Users threw a fit when Samsung decided not to allow users to update their Samsung Galaxy’s operating system to a new version of the Android operating system. Can you imagine 10 years ago users getting up in arms if Samsung didn’t ship a new 2 MP mini-camera to anyone who owned an earlier version of the phone which only had a 1 MP camera?
• An entire new software industry has emerged with its own standards and idiosyncrasies. About four decades ago, the rise of the computer created a brand new industry almost out of thin air. After all, think of all the wealth and enabled productivity that companies like Oracle, Microsoft, and Adobe have created over the past thirty years. There are early signs that a similar revolution is happening because of the rise of the smartphone. Entire fortunes have been created “out of thin air” as enterprising individuals and companies move to capture the potential software profits from creating software for the legions of iPhones and Android phones out there. What remains to be seen is whether or not the mobile software industry will end up looking more like the PC software industry, or whether or not the new operating systems and screen sizes and technologies will create something that looks more like a distant cousin of the first software revolution.

II. Look ma, no <insert other device here>

One of the most amazing consequences of Moore’s Law is that devices can quickly take on a heckuva lot more functionality then they used to. The smartphone is a perfect example of this Swiss-army knife mentality. The typical high-end smartphone today can:

• take pictures
• use GPS
• play movies
• play songs
• read articles/books
• find what direction its being pointed in
• sense motion
• record sounds
• run software

… not to mention receive and make phone calls and texts like a phone.

But, unlike cameras, GPS devices, portable media players, eReaders, compasses, Wii-motes, tape recorders, and computers, the phone is something you are likely to keep with you all day long. And, if you have a smartphone which can double as a camera, GPS, portable media player, eReaders, compass, Wii-mote, tape recorder, and computer all at once – tell me why you’re going to hold on to those other devices?

That is, of course, a dramatic oversimplification. After all, I have yet to see a phone which can match a dedicated camera’s image quality or a computer’s speed, screen size, and range of software, so there are definitely reasons you’d pick one of these devices over a smartphone. The point, however, isn’t that smartphones will make these other devices irrelevant, it is that they will disrupt these markets in exactly the way that Clayton Christensen described in his book The Innovator’s Dilemma, making business a whole lot harder for companies who are heavily invested in these other device categories. And make no mistake: we’re already seeing this happen as GPS companies are seeing lower prices and demand as smartphones take on more and more sophisticated functionality (heck, GPS makers like Garmin are even trying to get into the mobile phone business!). I wouldn’t be surprised if we soon see similar declines in the market growth rates and profitability for all sorts of other devices.

(to be continued in Part 2)

(Image credit) (Image credit)

Horseshoes and Hand Grenades

One of the first things you learn early on as a consultant is that it is impossible to have a precise answer to every question. There simply is not enough time in your busy schedule, and rarely is there good enough data, to get at the precision and accuracy that is needed for a “perfect answer”.

Consequently, you have to choose where you focus your time on getting precision and where you spend only the time needed to get a “good enough” answer, and the best consultants are very good at determining that balance.

I had never heard this balance described so eloquently as when a partner said (about prioritizing different components of some analysis we were doing): “It’s like horseshoes and hand grenades.”

I had no idea what he meant, and he must have sensed that.

“You know, with one [the horseshoe], you have to really get on target. And with the other, you don’t really need to be super-close to still have an impact [the grenade, obviously].”

A lovely image to explain a very basic concept in consulting. Spend your time getting the horseshoes right on target, and just chuck the freakin’ grenade kind of close and you’ll make plenty of impact and still make it home in time for dinner.

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I’m a New People

My girlfriend and I were checking out the Valentine Art Fair at the New People shopping center in San Francisco’s Japan Town to see the galleries and collections of various local and Japanese craftspeople. I saw the very nerdy but cute aquatic themed creations of Amy Ng’s Mr. Dead Fish, the adorable wool creations of Jackie Huang’s Wool Buddy, and the very lovable penguins from My Dear Darling. When I turned to leave, I spotted a drawing on the wall which seemed eerily familiar…

It’s like I was destined to be in that building in that particular place .

Happy Valentine’s Day, Lunar New Year, and President’s Day everyone!

A Shirt to Fight For

This past weekend I bought an awesome shirt which represents the battle between Good and Evil … with Silver Age DC comics characters! (Yes, in case you weren’t aware, I’m a big fan of comics)

The front, representing the forces of good are (a subset of) the Justice League: Wonder Woman, Green Lantern (Hal Jordan), Batman, Superman, the Flash (Barry Allen), and Aquaman!

On the back, representing the forces of evil are the supervillains  the Cheetah (I forgot her real name ), the Penguin, Brainiac V, Lex Luthor, the Joker, and the Riddler:

Yeah, you know you want one. Shockingly, I found this little gem in a (don’t laugh) Forever 21!

Heads and tails

I just read a really interesting Economist article which, at first, I thought was very counter-intuitive.

In the early days of television, there was very little in the way of network selection for the average TV-viewer. There were only a handful of stations and, regardless of how bad the content on a given station was, those stations would stay in business because they were the only stations around. Heck, even if the station’s programming was completely awful, there would still be plenty of people watching it simply because it was one of the only things that was on.

Flash forward a few decades. We now not only have many television stations, not to mention cable, satellite, and internet video. We have enough DVDs to last a lifetime. The web has made it so that anyone with a camera and an internet connection can broadcast to YouTube.

Given all this, what would you expect to happen to what people watch? If you’re anything like me, you would’ve concluded that the power of the internet to connect people with what they want and the abundance of new video content would have encouraged people to “spread out.” Why would you stick to a few “staple” networks, when you can now watch the SyFy channel for science fiction, CNN for the news, and YouTube if you want to keep LonelyGirl company?

Well, writer Chris Anderson seemed to agree and he popularized this idea in a book (and “theory”) he called The Long Tail (book cover to the right). In it he describes exactly what I just laid out, that because technology makes it easier for people to find the things which the majority of consumers aren’t interested in, the future of business would be less about selling a few popular items that “sort of” appeal to the “average person” and much more about selling a lot of the “the long tail” (pictured graphically below) of things which really appealed to a few people apiece. Or, to use the TV analogy again, the idea behind the Long Tail is that it makes more sense to create a bunch of small TV stations which focus only on a few niches than it is to have one big station that tries to satisfy everyone at once. This is, after all, one of the big ideas behind eCommerce sites like eBay. Wal-mart or Target can and will stock lamps which sells several millions of units, but because they can’t possibly stock every lamp, they won’t satisfy everyone. The Long Tail theory says that the real money to be made is in selling the millions of things which are only going to sell a few items apiece, but because those items are exactly what those people want, you can probably make a little extra profit off of each.

After all, how many authors or singers have you absolutely loved, but knew they could never go “mainstream”?

As appealing as that idea was (especially to the snobs out there, myself included, who just wanted to assure themselves that the real money wasn’t in going mainstream but in going for the nobody’s-ever-heard-of-them CD/book/electronic/movie), reality has not played out quite that way.

While there is no doubt that the internet has expanded choice such that people now have access to the long tail, instead of seeing a diminishing “head”, the size of the biggest hits has increased dramatically. Take books as an example. From the Economist:

A study of the Australian market by Nielsen, a research firm, found that the number of titles bought each year (measured by ISBNs) has risen dramatically, from about 275,000 in 2004 to almost 450,000 in 2007. Niche titles selling fewer than 1,000 copies each accounted for nearly all the growth in variety. Yet their market share fell. In Britain, sales of the ten bestselling books increased from 3.4m to 6m between 1998 and 2008.

So, instead of seeing a migration from the “head” to the Long Tail, we’re seeing Goldilocks’s middle-of-the-road players getting crushed by blockbuster hits on the one side and the long tail on the other. This begs the question: why are hits doing so well when there’s so much else out there? Again, the Economist:

A lot of the people who read a bestselling novel, for example, do not read much other fiction. By contrast, the audience for an obscure novel is largely composed of people who read a lot. That means the least popular books are judged by people who have the highest standards, while the most popular are judged by people who literally do not know any better. An American who read just one book this year was disproportionately likely to have read “The Lost Symbol”, by Dan Brown. He almost certainly liked it.

Ironically, it turns out the technology which makes the long tail more accessible is even better at turning hits into even bigger hits. After all, the internet helps spreads word-of-mouth for hits and long tail products alike. If anything, the fact that technology today makes it so easy to choose between different things is going to drive people to look for hits if only so they have something to talk about with one another.

Unfortunately for content and product people, this makes business very tricky. It means you can take one of two routes to success: make a blockbuster hit or sell a lot of niche products which appeal a great deal to a few people each. The former is tough to do because its hard to know what will be a hit. The latter is tough to do because you’ll need to have a very lean cost structure to be able to profitably make a lot of products which are only selling a few units a piece. But, the worst part is that trying to split the difference between both is especially hard as the former requires a big budget for marketing and for getting the best writers/artists/coders and the latter falls apart because you need to make many different things.

How things will ultimately shape out is anyone’s guess, but my perspective is that the smart companies out there will do three things:

1. Invest in strong PR and marketing muscle. If people seek hits because they want to be able to talk about things with each other, then the job of the product/content company is not just to make the best product possible, but its also to get people to talk about it. This means the smart companies will invest heavily in either a strong internal public relations/marketing group or a partnership with someone particularly strong in that area. This will be especially critical for the largest product companies/studios as having a strong PR/marketing capability will be an asset they can leverage across all their products, both those that need to be hits and those going for the long tail.
2. Find ways to cross-sell. The economics of a long tail business are grim, because they involve keeping and developing a wide range of products that are each only going to sell a few items. How do you do well with that type of strategy? The answer is that you do everything possible to turn flops and long tails into hits. One approach is to take a page out of Amazon.com’s playbook: recommendations. Amazon has found a way to encourage buyers to not just buy one thing, but to buy several by using a sophisticated computer algorithm to find products which people tend to buy together. This lets a company use one product to many others: free marketing, in a sense.
3. Be a lean, mean product-making machine. The only way to survive hits turning into flops is to make sure the hits don’t cost too much to make. The only way to make the long tail profitable is to make sure you have a lean operation in place which quickly and cheaply cranks out high quality ideas. Take some of the large social gaming companies like Zynga, maker of the very popular Facebook game Farmville. Don’t tell me that Fishville, Petville, Yoville, and Cafe World are completely original ideas . This is not to bash on Zynga, as I think the idea is brilliant and the quality of the games lies in the execution not necessarily in the originality of the concept, but in a world of hits and long tails, the best strategy is to find some core engine which you can re-hash and improve upon again and again. And few can question Zynga’s winning formula in that arena.

(Image credit – TV) (Image credit – Long Tail book) (Image credit – Long tail diagram)

If you have any love for Northern California

You will become a member of this Facebook petition to “Establish ‘Hella-’ as the SI Prefix for 10^²⁷“.

Why?

1. “Hella” is something that is quintessential Northern California (or as we call it, Norcal), and how could you not love a place which brings you Silicon Valley and San Francisco?
2. How awesome would it be to someday say that you have a “one hella-byte hard drive” or to say that the universe is “two hella-light years”?
3. I want to someday make a search engine just simply called “Hella” — sure its not quite the 10^¹⁰⁰ that a “googol” is, but that’s because my search engine only gets you 27% (on a logarithmic scale) of the way there

As a consultant, I’d normally turn these brilliant thoughts into a slide, but you’ll just have to trust that this is awesome

4 criteria

I know what you’re thinking. I’m too young and too early in my career to be able to give credible career advice (hasn’t stopped me, though, from giving recruiting advice). But, because of the New Year and the rough economy, I’ve been giving the same spiel several times, and, at least to my untrained ear, the following four criteria for career happiness are probably helpful guides for any new graduates or young “careerists” out there who are wondering what to look for in a job:

1. Work with people that you actually like and want to be like. Even if you only work 9-to-5, you are still spending ~50% of your waking life at your job. If you can’t look around and find people that you like and admire, you need to get out, or you’ll wind up either upset about the job all the time, stuck in a rut, or both because 50% of your day is spent with people you either hate, can’t learn from, or worse, both. That doesn’t bode well for your emotional happiness, your performance review, or your career progression.
2. Do something that interests or motivates you. Like I said, you are likely to spend at least 50% of your waking life at your job. If it’s not something that interests you or motivates you, that’s 50% of your life spent not developing. To be clear, you don’t have to be passionately in love with what you’re working on to be happy in your career, but if you can’t even say you’re “kinda” interested in what you do, that lack of interest will eventually show when you don’t go the extra mile for a promotion/raise or when you apply with a lackluster resume for a new job.
3. Be in a field that’s growing, not shrinking. A rising tide lifts all boats. In this case, a field that’s growing is not likely to be downsized and much more likely to have plenty of promotions, raises, and growth opportunities, even for people who wouldn’t make the bar at a less rapidly growing field. Conversely, a field that’s shrinking, no matter how profitable, will eventually find itself firing more people than it hires, cutting back on salary more than giving raises, and killing projects rather than providing workers with new opportunities. Try to get on a boat that’s in a rising tide.
4. Do something  where you can set yourself apart. Almost all of business strategy is motivated to respond to or shape one thing: “commoditization.” In the same way that tissue paper is a commodity and hence very cheap, job skills can also rapidly become commodities. And when that happens, the person with those skills will find their salary and prospects disappear. Someone with skills which set them apart from the flock will find plenty of prospects and plenty of salary.

Any person who has a job which fulfills all 4 criteria above will be in a good position career-wise, regardless of starting salary or sector. Many people I’ve spoken with focus on just one or two of these, oftentimes ignoring #4, or they focus only on things like the reputation of a company or the starting salary. The danger of that is that you may find yourself in a job where you are not valued or not developing or just plain unhappy with what you do on a daily basis, and regardless of the short-term benefits of that course of action, it leaves you in a bad position longer-term.

(Image credit)

Crazy Y Chromosomes

A few weeks ago, I set myself some 2010 goals. One of which was to make sure that I fit in reading at least one paper every month. What I didn’t say though, was that I would try to do a quick blog post on each (to help keep me honest).

I forgot exactly how I found this paper, but the subject immediately caught my eye:

Chimpanzee and human Y chromosomes are remarkably divergent in structure and gene content

What? I had always been taught that the genomic differences between chimpanzees and humans were extraordinarily small, and since I’m male, I was also drawn to the fact that it would talk about a chromosome that was very near and dear to me.

What I read was pretty amazing. Despite the fact that we are very genetically similar to chimpanzees the Y chromosomes of our two species are actually very different. The best depiction of this that I can point to is from Figure 2 of the paper (below). The two charts below are dot plots which show where the human and chimpanzee chromosomes “line up”, so to speak. The right-hand chart shows how closely related the human chromosome 21 is to the analogous chimpanzee chromosome. You can see this from the nearly perfect diagonal line, showing that the two chromosomes are pretty close to identical as you move from one end of the chromosome to the other. The left-hand chart shows a similar comparison of a human Y chromosome and a chipmanzee Y chromosome. Notice the difference?

While it was fascinating to read what specifically was different (i.e. repeats, ectopic homologous recombination, introduction of nonsense mutations and open reading frames), what I found most interesting was the speculation as to why the Y chromosomes of two very similar species would diverge so much in such a narrow period of time. The research group’s hypothesis is that the Y chromosome holds a great deal of influence over sperm production, and because a Y chromosome will never have a “partner” chromosome the way that every other non-sex-determining chromosome does, changes in the Y chromosome are likely to have very significant changes in sperm characteristics. Because female chimpanzees oftentimes mate with multiple males, there is strong sperm competition and hence strong selective pressure for chimpanzees to have rapid evolution in the Y chromosome.

Of course, this is all just a guess. One way to test it would be to compare the human Y chromosome sequence with further primate species and see if primates where sperm competition is less intense have more similar chromosomes as humans. Another would be to see if any of the genetic changes resulted in clear sperm/testes genetic or transcriptional control differences.

But, all in all, a very cool start to what I’m hoping will be a fun 12 months!

(Figure 2 from paper)

Paper: Hughes, Jennifer F. et al. “Chimpanzee and human Y chromosomes are remarkably divergent in structure and gene content.” Nature 463, 536-539 (28 January 2010) – doi:10.1038/nature08700