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Tag: Business

The Four Types of M&A

I’m oftentimes asked what determines the prices that companies get bought for: after all, why does one app company get bought for $19 billion and a similar app get bought at a discount to the amount of investor capital that was raised?

While specific transaction values depend a lot on the specific acquirer (i.e. how much cash on hand they have, how big they are, etc.), I’m going to share a framework that has been very helpful to me in thinking about acquisition valuations and how startups can position themselves to get more attractive offers. The key is understanding that, all things being equal, why you’re being acquired determines the buyer’s willingness to pay. These motivations fall on a spectrum dividing acquisitions into four types:

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  • Talent Acquisitions: These are commonly referred to in the tech press as “acquihires”. In these acquisitions, the buyer has determined that it makes more sense to buy a team than to spend the money, time, and effort needed to recruit a comparable one. In these acquisitions, the size and caliber of the team determine the purchase price.
  • Asset / Capability Acquisitions: In these acquisitions, the buyer is in need of a particular asset or capability of the target: it could be a portfolio of patents, a particular customer relationship, a particular facility, or even a particular product or technology that helps complete the buyer’s product portfolio. In these acquisitions, the uniqueness and potential business value of the assets determine the purchase price.
  • Business Acquisitions: These are acquisitions where the buyer values the target for the success of its business and for the possible synergies that could come about from merging the two. In these acquisitions, the financials of the target (revenues, profitability, growth rate) as well as the benefits that the investment bankers and buyer’s corporate development teams estimate from combining the two businesses (cost savings, ability to easily cross-sell, new business won because of a more complete offering, etc) determine the purchase price.
  • Strategic Gamechangers: These are acquisitions where the buyer believes the target gives them an ability to transform their business and is also a critical threat if acquired by a competitor. These tend to be acquisitions which are priced by the buyer’s full ability to pay as they represent bets on a future.

What’s useful about this framework is that it gives guidance to companies who are contemplating acquisitions as exit opportunities:

  • If your company is being considered for a talent acquisition, then it is your job to convince the acquirer that you have built assets and capabilities above and beyond what your team alone is worth. Emphasize patents, communities, developer ecosystems, corporate relationships, how your product fills a distinct gap in their product portfolio, a sexy domain name, anything that might be valuable beyond just the team that has attracted their interest.
  • If a company is being considered for an asset / capability acquisition, then the key is to emphasize the potential financial trajectory of the business and the synergies that can be realized after a merger. Emphasize how current revenues and contracts will grow and develop, how a combined sales and marketing effort will be more effective than the sum of the parts, and how the current businesses are complementary in a real way that impacts the bottom line, and not just as an interesting “thing” to buy.
  • If a company is being evaluated as a business acquisition, then the key is to emphasize how pivotal a role it can play in defining the future of the acquirer in a way that goes beyond just what the numbers say about the business. This is what drives valuations like GM’s acquisition of Cruise (which was a leader in driverless vehicle technology) for up to $1B, or Facebook’s acquisition of WhatsApp (messenger app with over 600 million users when it was acquired, many in strategic regions for Facebook) for $19B, or Walmart’s acquisition of Jet.com (an innovator in eCommerce that Walmart needs to help in its war for retail marketshare with Amazon.com).

The framework works for two reasons: (1) companies are bought, not sold, and the price is usually determined by the party that is most willing to walk away from a deal (that’s usually the buyer) and (2) it generally reflects how most startups tend to create value over time: they start by hiring a great team, who proceed to build compelling capabilities / assets, which materialize as interesting businesses, which can represent the future direction of an industry.

Hopefully, this framework helps any tech industry onlooker wondering why acquisition valuations end up at a certain level or any startup evaluating how best to court an acquisition offer.

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fbPhone

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This past weekend, a TechCrunch article caught the tech blogosophere off guard with an interesting claim:

Facebook is building a mobile phone, says a source who has knowledge of the project. Or rather, they’re building the software for the phone and working with a third party to actually build the hardware. Which is exactly what Apple and everyone else does, too.

The question is, does a Facebook phone platform (or, fbPhone to borrow the i/g prefix style corresponding to Apple and Google) make sense for Facebook to pursue?

On the one hand, Facebook is rapidly becoming an “operating system” of sorts for the web. According to Facebook’s statistics page, Facebook has over 550K active applications developed on it and over 1 million additional third party websites which have integrated in some fashion with this monumental platform. But, beyond sheer numbers, Facebook’s platform passes what I consider to be the true “is it a real platform” test that Windows, Linux, and Mac OS have passed: it has the ability to sustain a large $100M+ software company like Zynga (which has been estimated to generate over $800 million in annual revenues), capable of now spending enormous amounts on R&D and sales & marketing (and even of experimenting with its own rival gaming platform). This is something which, to my knowledge, the iPhone and Android ecosystems have yet to achieve.

Given its status as an “operating system” for web developers, there is certainly some value Facebook could gain from expanding into the mobile operating system sphere. It would make the Facebook experience more sticky for users who, once they step away from their computers, can only interact with the most basic Facebook features (pictures, notifications, news feeds) by making it easier for developers to truly view Facebook (mobile and desktop) as one application platform.

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On a strategic level, Facebook probably also sees potential dangers from Google and Apple’s control of the underlying smartphone software platforms. This control could transform Apple’s very shoddily constructed music “social networking service” Ping and Google’s thus-far unsuccessful attempts, as per its usual business strategy, to weaken Facebook’s dominant position in the social web into a serious threat to Facebook’s long-term position.

So, there are obvious benefits to Facebook in pursuing the platform route. However, I think there is an even more obvious downside: its HARD to build a mobile phone operating system. The TechCrunch article points out that Facebook has hired a number of the top mobile/tablet OS developers in the industry – while this means that its not impossible for Facebook to build a phone platform, its a long shot from building a full-fledged operating system. Assuming Facebook wants to build a phone, its unlikely to take the Apple route and build one monolithic phone. Like Google, Facebook’s business model is built around more user engagement, so a Facebook phone strategy would more likely be centered around getting as many users and phones possible to plug into Facebook.

The path towards such a phone platform (rather than single phone) requires many complicated relationships with carriers, with middleware providers, with hardware manufacturers, and with regulatory bodies (who are not too keen on Facebook’s privacy policies right now), not to mention deep expertise around hardware/software integration. Compare the dates for when Google and its wide swath of partners first announced the Open Handset Alliance (November 2007) to when the first Android phone was available (October 2008). A full year of committed development from industry giants HTC (hardware), Qualcomm (silicon), T-Mobile (carrier), and Google – and that’s assuming the alliance got started on the day that the project was announced and that partners like Verizon/Motorola/Samsung/ARM/etc did absolutely nothing.

From my perspective, Facebook has three much more likely (albeit still difficult) paths forward given the benefits I mentioned above for having its own mobile phone platform:

  • Build another “Open Handset Alliance” with the ecosystem: This is the only route that I see for Facebook to take if it wants its own, strong foothold in the mobile platform space. The challenge here is that the industry is not only tired of new platforms, but is also not likely to want to cede as much control to Facebook as they did to Google and Apple (and potentially Microsoft when it rolls out its Windows Phone 7 OS). This makes the path forward for Facebook complicated at best and, even when successful, requires it to compete against very well-established operating systems from Google & its partners and Apple.
  • Pull a HTC/Motorola and build a layer on top of or modify an open OS like Android or MeeGo: This, to me, makes the most sense. It eliminates the need for Facebook to invest heavily in hardware/network/silicon capabilities for deep phone platform development, and it also allows Facebook to leverage the application and ecosystem support that Android and MeeGo command (provided they don’t make too many modifications). Instead, Facebook can focus on building the tools and features that are most relevant to its own business goals. The downside to this, though, is that Facebook loses a fair amount of control over the final user experience and still has to play nice with the phone manufacturers, but these are things it would have to do no matter what strategy it picked
  • Just build a more complex mobile app which can support Facebook apps: This is the path of least resistance but leaves Facebook at the greatest mercy of Apple and Google, as well as forces Facebook to keep up with phone proliferation (iPhone 3G vs iPhone 3GS vs iPhone 4 vs DROID vs DROID 2 vs DROID X vs…)

Bottom-line: I don’t know if Facebook is even thinking about a bold mobile platform strategy, but if it is, I doubt it comes in the form of a full-fledged fbPhone. To me, it makes a lot more sense to stay the course and build more a sophisticated app in the short-term and, if needed, figure out ways to integrate rich user interface/development tool layers on an open operating system like Android or MeeGo.

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Why I Favor Google over Apple

image Many of my good friends are big fans of Apple and its products. But not me. This good-natured difference in opinion leads us into never-ending mini-debates over Twitter or in real life over the relative merits of Apple’s products and those of its competitors.

I suspect many of them (respectfully) think I’m crazy. “Why would you want an inferior product?” “Why do you back a company that has all this information about you and follows you everywhere on the internet?”

I figured that one of these days, I should actually respond to them (fears of flamers/attacks on my judgment be damned!).

imageFirst thing’s first. I’ll concede that, at least for now, Apple tends to build better products. Apple has remarkable design and UI sense which I have yet to see matched by another company. Their hardware is of exceptionally high quality, and, as I mentioned before, they are masters at integrating their high-end hardware with their custom-built software to create a very solid user experience. They are also often pioneers in new hardware innovations (e.g., accelerometer, multitouch, “retina display”, etc.).

So, given this, why on earth would I call myself a Google Fanboi (and not an Apple one)? There are a couple of reasons for it, but most of them boil down basically to the nature of Google’s business model which is focused around monetizing use rather than selling a particular piece of content/software/hardware. Google’s dominant source of profit is internet advertising – and they are able to better serve ads (get higher revenue per ad) and able to serve more ads (higher number of ads) by getting more people to use the internet and to use it more. Contrast this with Apple who’s business model is (for the most part) around selling a particular piece of software or hardware – to them, increased use is the justification or rationale for creating (and charging more for) better products. The consequence of this is that the companies focus on different things:

  • image Cheap(er) cost of access – Although Apple technology and design is quite complicated, Apple’s product philosophy is very simple: build the best product “solution” and sell it at a premium. This makes sense given Apple’s business model focus on selling the highest-quality products. But it does not make sense for Google which just wants to see more internet usage. To achieve this, Google does two main things. First, Google offers many services and development platforms for little or no cost. Gmail, Google Reader, Google Docs, and Google Search: all free, to name a few. Second, Google actively attacks pockets of control or profitability in the technology space which could impede internet use. Bad browsers reducing the willingness of people to use the internet? Release the very fast Google Chrome browser. Lack of smartphones? Release the now-very-popular Android operating system. Not enough internet-connected TV solutions? Release Google TV. Not enough people on high-speed broadband? Consider building a pilot high-speed fiber optic network for a lucky community. All of these efforts encourage greater Web usage in two ways: (a) they give people more of a reason to use the Web more by providing high-value web services and “complements” to the web (like browsers and OS’s) at no or low cost and (b) forcing other businesses to lower their own prices and/or offer better services. Granted, these moves oftentimes serve other purposes (weakening competitive threats on the horizon and/or providing new sources of revenue) and aren’t always successes (think OpenSocial or Google Buzz), but I think the Google MO (make the web cheaper and better) is better for all end-users than Apple’s.
  • Choice at the expense of quality – Given Apple’s interest in building the best product and charging for it, they’ve tended to make tradeoffs in their design philosophy to improve performance and usability. This has proven to be very effective for them, but it has its drawbacks. If you have followed recent mobile tech news, you’ll know Apple’s policies on mobile application submissions and restrictions on device functionality have not met with universal applause. This isn’t to say that Apple doesn’t have the right to do this (clearly they do) or that the tradeoffs they’ve made are bad ones (the number  of iPhone/iPad/iPod Touch purchases clearly shows that many people are willing to “live with it”), but it is a philosophical choice. But, this has implications for the ecosystem around Apple versus Google (which favors a different tradeoff). Apple’s philosophy provides great “out of the box” performance, but at the expense of being slower or less able to adopt potential innovations or content due to their own restrictions. image Case in point: a startup called Swype has built a fascinating new way to use soft keyboards on touchscreens, but due to Apple’s App Store not allowing an application that makes such a low-level change, the software is only available on Android phones. Now, this doesn’t preclude Swype from being on the iPhone eventually, but it’s an example where Apple’s approach may impede innovation and consumer choice – something which a recent panel of major mobile game developers expressed concern about — and its my two cents worth that the Google way of doing things is better in the long run.
  • image Platforms vs solutions – Apple’s hallmark is the vertically integrated model, going so far as to have their own semiconductor solution and content store (iTunes). This not only lets them maximize the amount of cash they can pull in from a customer (I don’t just sell you a device, I get a cut of the applications and music you use on it), it also lets them build tightly integrated, high quality product “solution”. Google, however, is not in the business of selling devices and has no interest in one tightly integrated solution: they’d rather get as many people on the internet as possible. So, instead of pursuing the “Jesus phone” approach, they pursue the platform approach, releasing “horizontal” software and services platforms to encourage more companies and more innovators to work with it. With Apple, you only have one supplier and a few product variants. With Google, you enable many suppliers (Samsung, HTC, and Motorola for starters in the high-end Android device world, Sony and Logitech in Google TV) to compete with one another and offer their own variations on hardware, software, services, and silicon. This allows companies like Cisco to create a tablet focused on enterprise needs like the Cius using Android, something which the more restrictive nature of Apple’s development platform makes impossible (unless Apple creates its own), or researchers at the MIT Media lab to create an interesting telemedicine optometry solution. A fair response to this would be that this can lead to platform fragmentation, but whether or not there is a destructive amount of it is an open question. Given Apple’s track record the last time it went solo versus platform (something even Steve Jobs admits they didn’t do so well at), I feel this is a major strength for Google’s model in the long-run.
  • image(More) open source/standards – Google is unique in the tech space for the extent of its support for open source and open standards. Now, how they’ve handled it isn’t perfect, but if you take a quick glance at their Google Code page, you can see an impressive number of code snippets and projects which they’ve open sourced and contributed to the community. They’ve even gone so far as to provide free project hosting for open source projects. But, even beyond just giving developers access to useful source code, Google has gone further than most companies in supporting open standards going so far as to provide open access to its WebM video codec which it purchased the rights to for ~$100M to provide a open HTML5 video standard and to make it easy to access your data from a Google service however you choose (i.e., IMAP access to Gmail, open API access to Google Calendar and Google Docs, etc.). This is in keeping with Google’s desire to enable more web development and web use, and is a direct consequence of it not relying on selling individual products. Contrast this with an Apple-like model – the services and software are designed to fuel additional sales. As a result, they are well-designed, high-performance, and neatly integrated with the rest of the package, but are much less likely to be open sourced (with a few notable exceptions) or support easy mobility to other devices/platforms. This doesn’t mean Apple’s business model is wrong, but it leads to a different conclusion, one which I don’t think is as good for the end-user in the long run.

These are, of course, broad sweeping generalizations (and don’t capture all the significant differences or the subtle ones between the two companies). Apple, for instance, is at the forefront of contributors to the open source Webkit project which powers many of the internet’s web browsers and is a pioneer behind the multicore processing standard OpenCL. On the flip side, Google’s openness and privacy policies are definitely far from perfect. But, I think those are exceptions to the “broad strokes” I laid out.

In this case, I believe that, while short-term design strength and solution quality may be the strengths of Apple’s current model, I believe in the long run, Google’s model is better for the end-customer because their model is centered around more usage.

I will leave you with another reason to love Google: Google ads have helped save princesses.

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Last thoughts on consulting

It’s not the first time I got this question, but, now that I’m done (at least for now) – what do I really think of management consulting?

  • image Great first job: I believe this is one of the best first jobs that you can get coming out of college or business school. It challenges you to think about issues which most people don’t get a chance to until they’re at the middle/senior manager level (e.g., the clients you work with). It also gives great practice in handling tough situations (e.g., hostile clients/customers, rapid deadlines, changing requirements, etc.) and forces you to learn how to work with many different types of people and thinking styles. It also introduces a mental discipline around finding and structuring solutions to tough problems, no matter the political situation or the perceived difficulties. Beyond the “boot camp” aspect, its also tends to pay a pretty decent salary and offer a very young and “work hard, play hard” culture which large companies tend to be unable to replicate.
  • Opens many doors: Consulting doesn’t end up fulfilling the 4 criteria for job satisfaction for everyone. But, not to fear – the skills I alluded to in the first point make new consultants very attractive to employers (some job openings primarily target consultants, like some private equity and corporate strategy roles) given the broad set of experiences and ability to perform in difficult situations. Furthermore, the abundance of MBAs and the networks of the more senior members of the firm provide consultants with a great network to use to help position themselves in new jobs. It’s a benefit that should not be discounted.
  • Very cyclical: There is no business which isn’t, to some extent, vulnerable to the business cycle, but as a fairly expensive client-services business with long lead-times in both hiring and getting new clients, management consulting is especially vulnerable. I can tell you that during a recession, things can get pretty tough. Clients are rarely willing to pay full price and demand much higher levels of quality. This, in turn, makes everyone’s lives harder and makes the firm reluctant to pay bonuses, hire additional workers, provide perks, or give promotions. This has no effect in the short-term, because there are no other job opportunities available in a recession, but when the economy begins to recover, it pushes more people to look elsewhere for jobs. The result of this is that during the ensuing recoveries/booms, firms can’t seem to do enough to hold on to their people. Compensation/bonuses go up and more promotions are granted as the firm becomes both forced to and more willing to do more to keep its people and hire new employees to handle the increased quantity of client work it wants to service – which itself becomes the over-capacity which leads to problems when a recession hits (and the cycle repeats). Now, this cycle is not unique to consulting, but it’s important to keep this in mind when considering consulting as a career because the very nature of the consulting business (long hiring/project lead times, expensive client-service) strongly amplifies the bad aspects of the consulting experience in recession and the good aspects during booms.
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  • Changing model making it harder for junior people: Like the previous bullet point, this is not unique to consulting, but it is a growing trend which I have observed. In the “Dark Ages” of business when the internet was not around and electronic data/contact lists were not so readily available, successful consultants did not require deep industry or operational area expertise to be effective – they could quickly come up to speed by finding the right data/experts and conducting the select set of analyses needed. But, as more data and “industry experts” became more readily available via the internet (and the market understanding there was demand for such things), clients began to demand more and more industry/operation-specific expertise from their consultants. This has forced the more senior members of a consulting firm to become industry/operational area experts. While this is a natural progression of the consulting model, an under-appreciated result of this is that junior members of the team now start new projects with a significant knowledge disadvantage from the senior members of the team. The result of which is that junior members may get less of an opportunity to work deeply with “the higher ups” and with the client (who expect junior consultants to be as well-versed as the senior members of the team). While strong teams and cultures find ways to mitigate these problems (with team norms, strong mentorship, and/or by allowing junior members to specialize, etc.), the change in the consulting model (and their adverse impacts) will likely continue. This is definitely something to think about if considering consulting.

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Nokia Conducting Search for a New CEO

Very provocative headline (see title of blog post) for an interesting WSJ piece:

“They are serious about making a change,” one person familiar with the matter said. Nokia board members are “supposed to make a decision by the end of the month,” that person said.

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They should be very serious about making a change – its been disappointment after disappointment at the former Finnish phone giant (and its stock price, see above). But, this gives me a great chance to play $100-armchair CEO. So, what would I do if I was in the big chair at Nokia? I’d be focusing on three things:

  • Change the OS approach: With Nokia’s next OS Symbian^3 delayed and widely perceived to be inadequate, you really need to question the ability of Nokia to keep up in the industry-shaking smartphone platform war. In particular, Nokia’s challenge is that its attempting to take a software platform built to enable carrier services and high reliability on lower-end phones that weren’t meant to run software and somehow force it into achieving the same high-end software functionality that Apple’s iOS and Google’s Android provide. While there’s nothing that says this is impossible, this is an order of magnitude more difficult than Apple/Google’s initial problem of just creating a software platform without the burden of any legacy constraints/approaches, and, in an industry as fast-moving and disruptive as the smartphone space, that’s two orders of magnitude too many, invites all sorts of risk with no clear reward, and discards Nokia’s traditional strengths in wireless communications R&D and solid hardware design. What does that mean? Three things:
    • Re-tool Symbian for the low-end to be more like Qualcomm’s BREW (or heck, maybe even adopt BREW?): an operating system focused on enabling carrier/simple software services on the many featurephones out there. That category is Nokia’s (and Symbian’s) traditional strength, and that’s where Symbian can still add a lot of value and find a lot of support.
    • image In the mid-market (high-end featurephone/low-end smartphones), I’d tell Nokia to bite the bullet and adopt Android. Not only is it free, but it immediately levels the software playing field between Nokia and the numerous  OEMs who are itching to adopt Android allowing Nokia’s traditional strength in hardware design to win over.
    • imageIn the high-end, Nokia should go all-in with Intel on their joint MeeGo platform. In that space, Nokia needs a killer platform to disrupt Google/Apple’s hold on the market, and MeeGo is probably the only operating system left which might contest Android and iOS and drive the convergence of mobile devices with traditional computers that this category is pushing towards.
    • Double-down on Qt to make it easier for developers to “develop for Nokia”. A few years ago, Nokia bought Trolltech which had created a programming framework called Qt (pronounced “cute”). Qt had gained significant traction with developres as it made it easier to make a graphical user interface which ran across multiple devices and operating systems. This is a key asset which Nokia has tried to use to make MeeGo and Symbian more attractive (and which is probably one of the main reasons both OS’s still have reasonable levels of developer interest; although, interestingly, there has been an effort to bring Qt over to Android), but it needs to be emphasized even more if Nokia wants to stay in the game.
  • Pick your battles wisely: It is entirely possible that Nokia has lost the high-end smartphone battle in the US and Europe (even despite the operating system approach laid out above). But, even if Nokia was forced to completely cede that market, its not the end of the war – its simply the loss of a few (albeit important) battlegrounds. Nokia is still well-positioned to win out in a number of other markets:
    • image The featurephone world: Many of us tech aficionados often forget that, despite all the buzz that the iPhone and the Droid devices generate, smartphones actually make up a very small unit base. Featurephones are still the vast majority of the volume (for cost reasons) and, as devices like the iPhone continue to capture mindshare, there will be significant value in helping featurephones imitate some of the functionality that smartphones have. While it is true that Moore’s Law makes it easier for high-end operating systems like iOS and Android to be run on tomorrow’s featurephones, the incentives of Apple and Google are to probably better aligned with taking their mobile operating systems up-market (towards higher-end devices and computers) rather than down-market (towards feature phones) to chase higher margins and to continue to build highly optimized performance machines. So, given Nokia/Symbian’s traditional strength in building good devices with good support for carrier services, its natural for Nokia to solidify its ownership of the feature phone market and to emulate some of the functionality of higher-end devices.
    • Emerging markets: This is related to the previous bullet point, but much of the developing world is now seeing vast value in simply adopting basic services and software on their (by Western standards) very low-end phones. As banking systems and computer availability are extremely limited in Africa and parts of Asia, this represents an enormous opportunity for someone like Nokia who has spent years making their phones capable of mobile payment, geolocation, and carrier-enabled services. Couple this with the fact that there is enormous growth waiting to happen in markets like India, China, and Africa (where cell phone penetration is nowhere near as high as in the US), and you have the makings of a potential end-game strategy which could offset short-term setbacks in the US/European smartphone market.
    • image Japan: While Europe and the US are eagerly adopting smartphones (as in phones with rich operating systems), Japan has been a laggard due to differences in the carrier/vendor/services environment. While its been difficult for foreign companies to break into Japan, the recent technology deal between Japanese semiconductor company Renesas and Nokia might provide an interesting “foot in the door” for Nokia to enter a large market where its weakness in software is not so much of a hindrance and its strengths in hardware/willingness to play nice with carriers are a big asset. This is in no way a slam-dunk, but its definitely worth considering.
  • Figure out the key ecosystem player(s) to partner with: The previous two bullet points were mainly tactical suggestions – what to do in the short-run and how to do it. This last bullet point is aimed at the strategic level – or, in other words, how does Nokia influence the creation of a market environment which leads to its long-term success. To do this, it needs to figure out who it wants to be and what it wants the mobile phone industry to look like when all is said and done. I don’t have a clear answer/vision here, but I’d say Nokia should think about partnering with:
    • Carriers: Although Apple/Android have had to play nice with the carriers to get their devices out, the carriers probably see the writing on the wall. If smartphone platforms continue to gain traction, there is significant risk that the carriers themselves will simply become the “dumb pipes” that the platforms run on (in the same way that  internet service providers like AOL rapidly became unimportant to the user experience and purchasing decision). Nokia has an opportunity to play against that and to help bring the carriers back to the table as a driving force by helping the carriers expose new revenue streams/services (which Nokia could take a cut of) and by building more carrier-friendly software/devices which help with coming bandwidth issues.
    • image Retailers/Mobile commerce intermediaries: One of the emerging application cases which is particularly interesting is the use of mobile phones for the buying and selling of goods. This is something which is extremely nascent but has a huge opportunity as mobile commerce can do something that traditional desktop-bound eCommerce can’t: it can bridge the gap between pixels on the screen and actual real-world shopping. It can be used as a mobile coupon/payment platform. It’s camera and GPS enables augmented reality functionality which can let shoppers look up information about a product without having to type in search-strings. It can be used to provide stores with more information about a shopper, letting them tailor new ad campaigns and marketing efforts. I haven’t run the math to build a forecast, but there’s good reason to believe that this could be the application for mobile phones. While Nokia may have to cede application/ad revenue to Google/Apple, it may be able to eke out a nice chunk of profit (maybe even bigger than the one Google/Apple can get) from focusing on this particular need case instead.

Obviously, none of these are guaranteed home-runs, but if I were a Nokia shareholder, I’d hope that the next Nokia CEO does something along the lines of this. And, yes, I’d be willing to accept $100 (and “some” stock) to be Nokia’s CEO and implement this :-).

(Image credit – Business Insider) (Image credit – Android logo) (Image credit – MeeGo logo) (Image credit – feature phone montage) (Image credit – Japanese phones) (Image credit – Mobile coupon)

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Tails of the TV

A few months ago, I posted on why the Long Tail hypothesis that technology would reduce the importance of general “hits” in favor of the “long tail” of niche products was wrong and how businesses should respond. In the Economist’s recent coverage of the television industry, they note how this has played out when it comes to how American studios have done overseas:

A few years ago there was much talk of localising television shows. Stung by charges of cultural imperialism, which were particularly loud in France, the big media conglomerates encouraged their foreign subsidiaries to develop their own programming. Although some still do so, it is no longer the rule. MTV India, for example, is dominated by local acts but MTV Poland is a vehicle for international music.

These days MTV International is run “more like a global multinational”, says Bob Bakish, its president. It produces local content where there is demand for the stuff. But it is also a co-ordinated distribution engine for American programming. Series like “Jersey Shore”, an oddly compelling show that trails Italian-American youths around beaches and bars, are now released simultaneously outside America. When Michael Jackson died, MTV quickly assembled a reel of the singer’s performances and dispatched it around the world.

imageHow could American hits possibly outcompete localized content? In my last post, I discussed some of the consumer-oriented reasons why this was true. First, an abundance of choices encourages consumers to make sure they watch the same content as the others in their social circles. Secondly, the same technology which makes it easier for people to access the “long tail” also makes it easier  to access and engage with hits through websites, chatrooms, online “webisodes”, in-show music, related graphic novels/magazines, smartphone apps, games, social media, etc. This sort of multi-platform content strategy even has a Hollywood buzzword to go with it: transmedia.

But, consumer-oriented reasons aside, there is also a fundamental business reason for the dominance of Western television overseas: those studios with the biggest hits are also likely to have the wallets needed to pay for better directors, better cameras, better editing, and better special effects. Combine that with the impact of Moore’s Law on television quality and you have an enviable virtuous cycle which most businesses dream of getting:

Get hold of a copy of a drama made by Hollywood for American broadcast TV—“CSI”, “Glee” or “Heroes” will do fine—and, at a random moment, press the pause button. What do you see? Handsome actors, no doubt. But also a well-composed shot that resembles a photograph, with the actors well positioned within the frame. The shot will be well lit, too. Now do the same for a show made by a foreign broadcaster. The result? Probably less impressive.

Finely crafted television like this is expensive. It costs more than $3m for an hour of drama that is good enough to pass muster on an American broadcast network. The visual acuity of Hollywood’s best shows is a big reason why they can compete against home-grown products that are more culturally relevant. Their advantage is growing as households across the world invest in bigger, sharper televisions.

I don’t think this changes any of the lessons I discussed in my previous post (build a strong PR machine, find ways to cross-sell/bundle, build an efficient and repeatable content creation engine which can survive a few failures but capitalize on a hit); it only raises the stakes – if you don’t have the PR, the bundle, and the repeatable formula: your hits won’t be nearly as big and your failures will be all the more painful.

(Image credit – transmedia diagram)

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Microsoft surprise attack!

If you’ve been following the tech news, you’ll know that iPhone-purveyor Apple has launched a patent infringement lawsuit against HTC, one of the flagship (Taiwanese) phone manufacturers partnered up with Google and Microsoft to push Android and Windows phones. While HTC may be the company listed on the lawsuit, it was fairly clear that this was a blow against all iPhone imitators and especially against Google’s Android mobile phone (which was recently reported to have generated more mobile web traffic in the US than the iPhone).

But, as I’ve pointed out before, the lines between enemy and friend are murky in the technology strategy space. It would seem that Microsoft may have just thrown HTC (and hence the Android platform and other would-be iPhone-killers) a surprise lifeline:

REDMOND, Wash. — April 27, 2010 — Microsoft Corp. and HTC Corp. have signed a patent agreement that provides broad coverage under Microsoft’s patent portfolio for HTC’s mobile phones running the Android mobile platform. Under the terms of the agreement, Microsoft will receive royalties from HTC.

The agreement expands HTC’s long-standing business relationship with Microsoft.

“HTC and Microsoft have a long history of technical and commercial collaboration, and today’s agreement is an example of how industry leaders can reach commercial arrangements that address intellectual property,” said Horacio Gutierrez, corporate vice president and deputy general counsel of Intellectual Property and Licensing at Microsoft. “We are pleased to continue our collaboration with HTC.”

Bolding was, of course, my doing.

Why? Other than to just make us ask “why?” I have no idea, but I’d conjecture its a combination of three things:

  • Sizable royalty stream: Microsoft is an intellectual property giant. But, given Microsoft’s tenuous and potentially weakening position in mobile phones, they have probably been unable to fully monetize their own intellectual property. Why not test the waters with a company who is already friendly (HTC is a leading supplier of Windows Mobile phones), who desperately needs some intellectual property protection, and is churning out Android phones as if its life depended on it? And, if this works out, it opens the doorway for Microsoft to extract further royalties from other Android phone makers as well (and its even been suggested ominously that perhaps Microsoft is using this as an intellectual property ploy against all Linux systems as well).
  • The enemy of my enemy is my friend: Apple is the Goliath that Windows, Blackberry, Symbian, WebOS, and Android need to slay. Given Microsoft’s unique advantage from being the leading PC operating system, one potentially feasible strategy would be to simply stall its competitors from building a similar position in the mobile phone space (like by helping Android take on Apple) and, when Microsoft is nice and ready, win in mobile phones by moving the PC “software stack” into the mobile phone world and creating better ties between computers (which run Microsoft’s own Windows operating system) and the phone.
  • HTC probably made some fairly significant concessions to Microsoft: I’m willing to bet that HTC has either coughed up some extremely favorable intellectual property royalty/licensing terms or has promised to support Microsoft’s Windows Phone 7 series in a very big way. Considering how quickly HTC embraced Android when it was formerly a Windows-Mobile-only shop, its probably not a stretch to believe that there were probably active discussions within HTC over whether or not to drop Microsoft’s faltering platform. An agreement from HTC to build a certain number of Windows phones or to align on roadmap would be a blessing for Microsoft who likely needs all the friends it can get to claw back smartphone market share.

Obviously, I could be completely wrong here (its unclear if Microsoft can even provide HTC with sufficient legal “air cover” against Apple), but the one thing that nobody can deny is that tech strategy is never boring.

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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.

imageBut 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.

imageThe 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.
  • image 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)

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Why smartphones are a big deal (Part 1)

image 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>

imageOne 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)

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Heads and tails

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

image 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?

imageWell, 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”?

image

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)

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How to properly define a company’s culture

Company culture is a concept which, while incredibly difficult to explain or measure, is very important to a company’s well-being and employee morale. Too often, it comes in the form of vaguely written out “corporate mission statements” or never-ending lists of feel-good, mean-nothing “company values”. Oh joy, you value “teamwork” and “making money” – that was so insightful…

It was thus very refreshing for me to read the Netflix company culture document (HT: Hacking NetFlix, embedded below via SlideShare):

Slidumentation aside, I think the NetFlix presentation does three things extremely well:

  1. It’s not a list of feel-good words, but  actual values and statements which can actually guide the company in its day-to-day hiring, evaluation. Most company culture statements are nothing but long lists of virtues and things non-sociopaths respect. “Teamwork” and “honesty”, for example, are usually among them. But, as the Netflix presentation points out, even Enron had a list of “values” and that wound up not amounting to much of anything. Instead, Netflix has a clear state of  things they look for in their employees, each with clear explanations for what they actually mean. For “Curiosity”, Netflix has listed four supporting statements:
    • You learn rapidly and eagerly
    • You seek to understand our strategy, markets, subscribers, and suppliers.
    • You are broadly knowledgeable about business, technology, and entertainment.
    • You contribute effectively outside of your specialty

    Admittedly, there is nothing particularly remarkable about these four statements. But what is remarkable is that it is immediately clear to the reader what “curiosity” means, in the context of Netflix’s culture, and how Netflix employees should be judged and evaluated. It’s oftentimes astounding to me how few companies get to this bare minimum in terms of culture documents.

  2. Netflix actually gives clear value judgments.  I’ve already lamented the extent to which company culture statements are nothing more than laundry lists of “feel good” words. Netflix admirably cuts through that by not only explaining what the values mean, but also by what should happen when different “good words” conflict. And, best of all, they do it with brutal honesty. For instance, Netflix on how they won’t play the “benefits race” that other companies play:

    A great work place is stunning colleagues. Great workplace is not day-care, espresso, health benefits, sushi lunches, nice offices, or big compensation, and we only do those that are efficient at attracting stunning colleagues.

    Netflix on teamwork versus individual performance:

    Brilliant jerks: some companies tolerate them, [but] for us, the cost to teamwork is too high.

    Netflix on its annual compensation review policy:

    Lots of people have the title “Major League Pitcher” but they are not all equally effective. Similarly, all people with the title “Senior Marketing Manager” and “Director of Engineering” are not equally effective … So, essentially, [we are] rehiring each employee each year (and re-evaluating them based on their performance) for the purposes of compensation.

    Within each of the three examples, Netflix has done two amazing things: they’ve made a bold value judgment, which most companies fail to do, explaining just how the values should be lived, especially when they conflict (“we don’t care how smart you are, if you don’t work well with the team, you have to go”), and they’ve even given a reason(“teamwork is more important to delivering impact for our customers than one smart guy”).

  3. They explain what makes their culture different from other companies and why. Most people who like their jobs will give “culture” as a reason they think their company is unique. yet, if you read the countless mission statements and “our values” documents out there, you’d never be able to see that difference. Granted, the main issue may just be that management has chosen not to live up to the lofty ideals espoused in their list of virtues, but what might help with that and make it clearer to employees about what makes a particular workplace special is explaining how and why the company’s culture is different from another’s. Contrast that with the Netflix presentation, which spends many slides explaining the tradeoffs between too many rules and too few, and why they ultimately sided with having very few rules, whereas a manufacturing company or a medical company would have very many of them. They never go so far as to say that one is better than the other, only that they are different because they are in different industries with different needs and dynamics. And, as a result of that, they have implemented changes, like a simpler expense policy (“Act in Netflix’s best interests”) and a revolutionary vacation policy (“There is no policy or tracking”) [with an awesome explanation: “There is also no clothing policy at Netflix, but no one has come to work naked lately”].

Pay attention, other companies. You would do well to learn from Netflix’s example.


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Don’t count your markets before they hatch

I was reading a very insightful analysis of the supercomputing industry over the past decade on scalability.org, when I stumbled on a chart which illustrates not only a pattern I see very often, but also a reason why you should always sandbag your forecasts if you’re betting on a new technology: your forecasts are almost always too optimistic.

Take Intel’s and HP’s huge gambit to push Itanium as the processor technology which would eventually replace all the other major processor technologies (i.e. SPARC, PowerPC, even Intel’s very own x86). Countless technology analysts and Intel/HP market researchers said Itanium would become the only game in town in computer processor technology – and with good reason. The technology that Itanium represented, in theory would’ve completely changed the processor technology game.

Yet, if we look at the progression of Itanium sales versus Itanium forecasts, we see a very different picture:

image

If anything, Intel/HP have now distanced themselves from Itanium – preferring to ship products based on Intel’s homegrown x86 technology, rather than the technology analysts had expected to storm the market.

Kind of embarrassing, isn’t it? The point isn’t to spit on HP and Intel’s faces (however much they deserve it), but to point out that new technologies are notoriously hard to predict, and to whatever extent is possible, companies everywhere should (a) never bet the farm on them and (b) watch what forecasts they’re making. They may come back to haunt them.

(Image credit)

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Does an iTablet exist?

image If you follow the technology industry gossip, you’ll have heard the rumors that Apple will release a next-generation tablet PC at the end of January (kind of like Moses bringing tablets with the word of God?)

Industry gossip, especially gossip about Apple, is notoriously bad as the many analysts out there oftentimes fail to understand Apple’s business and misread the things that they hear.

However, given the very precise supply chain reports out there (as well as the #2 exec at European telecom firm Orange’s announcement that they would be a partner with Apple), I am leaning towards believing this device exists.

Granted this is all speculation (and there’s a significant chance the industry is getting excited over nothing), and my good (and very intelligent) buddy Eric disagrees with me completely (for good reasons), but my thinking on the subject stems from three things:

  • A rapidly growing device category exists – When I first heard of the netbook category, I scoffed. After all, what is the difference between a netbook and a very cheap, underpowered notebook or an extremely powerful smartphone? However, as time went by, I was forced to eat my own words. There seemed to be an enormous appetite for such a device (as judged by the rapid growth rate of the netbook category) which didn’t seem to cut too deeply into notebook sales at all. Intel has even come on record as saying that netbooks are rarely bought, if ever, to replace notebooks! Whereas mobile phones are likely to replace portable media players (like iPods), it seemed that people were drawn to the idea of something in between a workhorse laptop and a smartphone to be used primarily to access the internet. This is also borne out by the booming growth in eReaders like Amazon’s Kindle which provide special interfaces, like special touchscreens and displays, which are tailored for casual internet browsing and reading. If there is a place for Apple to continue its rapid growth trajectory, a device category with specific technical needs and with potential for rapid growth like this in-between-smartphone-and-notebook eReader/tablet/netbook device would be it.
  • Clear room for user interface innovation – The current generations of netbooks and eReaders could use some significant improvement. Most netbooks don’t (yet) support a touchscreen interface and rarely sport a user interface that really wows. eReaders today predominantly depend on current generations of black-and-white-only e-Ink displays which suffer from a very slow page-change rate. The potential for someone with the hardware and UI design chops that Apple has to implement a new generation of display technology and provide a much needed refresh in the control scheme for these devices is enormous, and it fits with Apple’s history of changing how the industry and the consumer thought of products like the smartphone and portable media player (iPhone and iPod).
  • A vertical model fits – Apple’s standard strategy is to build strong end-to-end solutions that encompass hardware, software, and services in a neatly packaged product. This helps Apple maintain the quality of product experience, as well as extract extra profit by creating  a powerful “walled garden” which prevents other companies from seizing control of Apple’s key features and sources of revenue. Take the iPhone for instance – Apple has built the phone, designed the operating system, created an application and music store, and negotiated the proper service contract with a wireless carrier. It doesn’t get more “all in one/vertical” than that! Similarly, if a tablet emerges primarily as a means to get on the internet and read books/publications/blogs, there are a number of clear ways for Apple to “go vertical” – including adding an eBook store to iTunes, charging publishers a fee to distribute their products to “iTablet” owners, building a subscription model for content access, etc. This wouldn’t be an easy battle, but given Apple’s success with mobile phone applications and digital music, there’s plenty of precedent for seeing Apple expand its “content empire” to other forms of digital content.

Of course, there are a number of good reasons why this prediction might not wind up being true:

  • image Apple doesn’t believe that the market opportunity is large enough. Is the growth in netbooks sustainable? Or just a product of the global recession pushing people to buy very cheap electronics? If Apple suspects its the latter, that would be a great reason to not distract management from more important tasks like maintaining or increasing its desktop/notebook market share or defending the iPhone’s market share against a growing Android threat (and potentially a resurgent Blackberry and Windows Mobile 7 threats).
  • Apple fears cannibalization. While Intel might view netbooks as a chance to sell more chips without interfering with its higher-end chips, Apple may fear that Apple notebook users, many of whom don’t need all the processing power that’s in their machines as they merely use them to surf the internet or watch movies/listen to music, will simply “trade down” and be tempted completely away from buying Apple’s higher end notebook models and hence jeopardizing Apple’s long-term growth and profitability.
  • Technological solutions to current problems aren’t mature enough. While the iPhone pushed the mobile phone industry, overnight, to adopt touchscreens, what is oftentimes not understood is that the touchscreen technology used by Apple has been around for quite some time (and were probably approved for use by Apple because they were mature). Many of the new display technologies to replace and/or improve on e-Ink are much less mature. If Apple has studied the problems facing current generations of tablet/netbook/ereaders and concluded that compelling solutions to them are still a year or two away, then, I believe that Apple would wait until they did come out to really storm the market.
  • Apple doesn’t think it can compete with a successful vertical model. If Apple felt it couldn’t use its standard playbook of providing services/content along with software and hardware, then that would be a big reason for Apple to not consider this mode. This could be because of the presence of large book-sellers like Barnes & Noble and Amazon in the eBook space (who do not allow non-Amazon/non-Barnes & Noble approved devices to access their digital libraries) or because of a powerful third party like Google which is already pushing one universal access platform for all eBooks. In my mind, this would be one of the biggest, if not the biggest, reason for Apple to think twice about entering the tablet/eReader space.

I’m glad my personal financial well-being doesn’t depend on me making the right call on this one :-), but push comes to shove, given the pretty-specific-supply-chain checks and the fact that I believe the threat of cannibalization and small market opportunity to be unlikely, I believe Apple will make this plunge, and I eagerly await to see how it will shape this new emerging device category.

(Image credit) (Image credit)

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Is someone at Microsoft listening?

A few weeks ago, I puzzled over why Microsoft isn’t pursuing a more integrated device strategy across its non-PC platforms. After all, if you’re on shaky ground (new device markets), you should do everything you can to steady yourself against something more firm (like your PC business or the combination of your other devices).

image So, imagine my surprise when I read off of Engadget and The Register that Microsoft is looking for developers to help bring the X-Box Live experience to Windows Mobile phones. Could it be that they’re listening to me? 🙂 (Rhetorical question, of course, no need to burst my bubble) Or maybe someone at Samsung (who recently announced an app store for apps across their phones, TVs, Blu-Ray players, etc) was listening?

This play is not a sure thing, by any stretch of the imagination, but it may just allow Windows Mobile to compete on a more equal standing with Google’s Android and Apple’s iPhone platforms – two devices which, for all the hype as hardcore application systems, have so far turned out to be little more than email-and-game systems (although that is likely to change as the devices adopt new higher-performance ARM Cortex A9 processors).

(Image credit)

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Off the Market: How to Profit from Infidelity

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Infidelity has major consequences. The biggest ones are (or at least should be) personal consequences (loss of trust and hurting someone you care about), but when you’re a public figure like Tiger Woods, it can also have major financial consequences (like the loss of advertisement deals and negative impact to one’s reputation).

image Leave it to some enterprising significant others of professional athletes to create a company called Off the Market to find a way to profit from this (HT: CNBC). Off the Market is an invite-only event where professional athletes and their significant others, at no cost, can mingle and access information and products/services to help, as their mission statement puts it, “help athletes sustain a positive and sexy relationship with their mates”.

And how does Off the Market fund itself?

[Off the Market] will make money by signing sponsors that will have access to the power players at the parties and through the Web site’s e-commerce page.

Gift bags to Monday’s event, for example, will have a product from Tenga, which makes adult toys for men.

“It’s a perfect partnership,” Robbins said. “Our men can use this product on the road and that will help them stay straight at home.”

Other sponsors of Monday’s event include Judith Ripka jewelry, Vita Coco drink, the W Hotel in Hoboken, Modern Luxury Ventures (concierge company) and Coastal Advisors, an insurance company that writes policies for athletes.

Robbins says she hopes to spice up the sponsorship deals.

“We’d like to offer a private lesson for strip pole dancing one day or even offer to have a strip pole built in a home,” Robbins said.

Impressive way to connect delivering a valuable service addressing a distinct need to financial return.

(Image credit – Flowchart)

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What is with Microsoft’s consumer electronics strategy?

image Regardless of how you feel about Microsoft’s products, you have to appreciate the brilliance of their strategic “playbook”:

  1. Use the fact that Microsoft’s operating system/productivity software is used by almost everyone to identify key customer/partner needs
  2. Build a product which is usually only a second/third-best follower product but make sure it’s tied back to Microsoft’s products
  3. Take advantage of the time and market share that Microsoft’s channel influence, developer community, and product integration buys to invest in the new product with Microsoft’s massive budget until it achieves leadership
  4. If steps 1-3 fail to give Microsoft a dominant position, either exit (because the market is no longer important) or buy out a competitor
  5. Repeat

While the quality of Microsoft’s execution of each step can be called into question, I’d be hard pressed to find a better approach then this one, and I’m sure much of their success can be attributed to finding good ways to repeatedly follow this formula.

image It’s for that reason that I’m completely  bewildered by Microsoft’s consumer electronics business strategy. Instead of finding good ways to integrate the Zune, XBox, and Windows Mobile franchises together or with the Microsoft operating system “mothership” the way Microsoft did by integrating its enterprise software with Office or Internet Explorer with Windows, these three businesses largely stand apart from Microsoft’s home field (PC software) and even from each other.

This is problematic for two big reasons. First, because non-PC devices are outside of Microsoft’s usual playground, it’s not a surprise that Microsoft finds it difficult to expand into new territory. For Microsoft to succeed here, it needs to pull out all the stops and it’s shocking to me that a company with a stake in the ground in four key device areas (PCs, mobile phones, game consoles, and portable media players) would choose not to use one of the few advantages it has over its competitors.

The second and most obvious (to consumers at least) is that Apple has not made this mistake. Apple’s iPhone and iPod Touch product lines are clear evolutions of their popular iPod MP3 players which integrate well with Apple’s iTunes computer software and iTunes online store. The entire Apple line-up, although each product is a unique entity, has a similar look and feel. The Safari browser that powers the Apple computer internet experience is, basically, the same that powers the iPhone and iPod Touch. Similarly, the same online store and software (iTunes) which lets iPods load themselves with music lets iPod Touches/iPhones load themselves with applications.

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That neat little integrated package not only makes it easier for Apple consumers to use a product, but the coherent experience across the different devices gives customers even more of a reason to use and/or buy other Apple products.

Contrast that approach with Microsoft’s. Not only are the user interfaces and product designs for the Zune, XBox, and Windows Mobile completely different from one another, they don’t play well together at all. Applications that run on one device (be it the Zune HD, on a Windows PC, on an XBox, or on Windows Mobile) are unlikely to be able to run on any other. While one might be able to forgive this if it was just PC applications which had trouble being “ported” to Microsoft’s other devices (after all, apps that run on an Apple computer don’t work on the iPhone and vice versa), the devices that one would expect this to work well with (i.e. the Zune HD and the XBox because they’re both billed as gaming platforms, or the Zune HD and Windows Mobile because they’re both portable products) don’t. Their application development process doesn’t line up well. And, as far as I’m aware, the devices have completely separate application and content stores!

While recreating the Windows PC experience on three other devices is definitely overkill, I think, were I in Ballmer’s shoes, I would recommend a few simple recommendations which I think would dramatically benefit all of Microsoft’s product lines (and I promise they aren’t the standard Apple/Linux fanboy’s “build something prettier” or “go open source”):

  1. Centralize all application/content “marketplaces” – Apple is no internet genius. Yet, they figured out how to do this. I fail to see why Microsoft can’t do the same.
  2. Invest in building a common application runtime across all the devices – Nobody’s expecting a low-end Windows Mobile phone or a Zune HD to run Microsoft Excel, but to expect that little widgets or games should be able to work across all of Microsoft’s devices is not unreasonable, and would go a long way towards encouraging developers to develop for Microsoft’s new device platforms (if a program can run on just the Zune HD, there’s only so much revenue that a developer can take in, but if it can also run on the XBox and all Windows Mobile phones, then the revenue potential becomes much greater) and towards encouraging consumers to buy more Microsoft gear
  3. Find better ways to link Windows to each device – This can be as simple as building something like iTunes to simplify device management and content streaming, but I have yet to meet anyone with a Microsoft device who hasn’t complained about how poorly the devices work with PCs.

(Image credit – Ballmer) (Image credit – Zune HD) (Image credit – Apple store)

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Web 3.0

About a year ago, I met up with Teresa Wu (of My Mom is a Fob and My Dad is a Fob fame). It was our first “Tweetup”, a word used by social media types to refer to meet-up’s between people who had only previously been friends over Twitter. It was a very geeky conversation (and what else would you expect from people who referred to their first face-to-face meeting as a Tweetup?), and at one point the conversation turned to discuss our respective visions of “Web 3.0”, which we loosely defined as what would come after the current also-loosely-defined “Web 2.0” wave of today’s social media websites.

On some level, trying to describe “Web 3.0” is as meaningless as applying the “Web 2.0” label to websites like Twitter and Facebook. It’s not an official title, and there are no set rules or standards on what makes something “Web 2.0”. But, the fact that there are certain shared characteristics between popular websites today versus their counterparts from only a few years ago gives the “Web 2.0” moniker some credible intellectual weight; and the fact that there will be significant investment in a new generation of web companies lends special commercial weight as to why we need to come up with a good conception of “Web 2.0” and a good vision for what comes after (Web 3.0).

So, I thought I would get on my soapbox here and list out three drivers which I believe will define what “Web 3.0” will look like, and I’d love to hear if anyone else has any thoughts.

  1. A flight to quality as users start struggling with ways to organize and process all the information the “Web 2.0” revolution provided.
  2. The development of new web technologies/applications which can utilize the full power of the billions of internet-connected devices that will come online by 2015.
  3. Browser improvement will continue and enable new and more compelling web applications.

I. Quality over quantity

In my mind, the most striking change in the Web has been the evolution of its primary role. Whereas “Web 1.0” was oriented around providing information to users, generally speaking, “Web 2.0” has been centered around user empowerment, both in terms of content creation (blogs, Youtube) and information sharing (social networks). Now, you no longer have to be the editor of the New York Times to have a voice – you can edit a Wikipedia page or upload a YouTube video or post up your thoughts on a blog. Similarly, you no longer have to be at the right cocktail parties to have a powerful network, you can find like-minded individuals over Twitter or LinkedIn or Facebook.

The result of this has been a massive explosion of the amount of information and content available for people and companies to use. While I believe this has generally been a good thing, its led to a situation where more and more users are being overwhelmed with information. As with the evolution of most markets, the first stage of the Web was simply about getting more – more information, more connections, more users, and more speed. This is all well and good when most companies/users are starving for information and connections, but as the demand for pure quantity dries up, the attention will eventually focus on quality.
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While there will always be people trying to set up the next Facebook or the next Twitter (and a small percentage of them will be successful), I strongly believe the smart money will be on the folks who can take the flood of information now available and milk that into something more useful, whether it be for targeting ads or simply with helping people who feel they are “drinking from a fire hose”. There’s a reason Google and Facebook invest so much in resources to build ads which are targeted at the user’s specific interests and needs. And, I feel that the next wave of Web startups will be more than simply tacking on “social” and “online” to an existing application. It will require developing applications that can actually process the wide array of information into manageable and useful chunks.

II. Mo’ devices, mo’ money

image A big difference between how the internet was used 10 years ago and how it is used today is the rise in the number of devices which can access the internet. This has been led by the rise of new smartphones, gaming consoles, and set-top-boxes. Even cameras have been released with the ability to access the internet (as evidenced by Sony’s Cybershot G3). While those of us in the US think of the internet as mainly a computer-driven phenomena, in much of the developing world and in places like Japan and Korea, computer access to the internet pales in comparison to access through mobile phones.

The result? Many of these interfaces to the internet are still somewhat clumsy, as they were built to mimic PC type access on a device which is definitely not the PC. While work by folks at Apple and at Google (with the iPhone and Android browsers) and at shops like Opera (with Opera Mini) and Skyfire have smoothed some of the rougher edges, there is only so far you can go with mimicking a computer experience on a device that lacks the memory/processing power limitations and screen size of a larger PC.

This isn’t to say that I think the web browsing experience on an iPhone or some other smartphone is bad – I actually am incredibly impressed by how well the PC browsing experience transferred to the mobile phone and believe that web developers should not be forced to make completely separate web pages for separate devices. But, I do believe that the real potential of these new internet-ready devices lies in what makes those individual devices unique. Instead of more attempts to copy the desktop browsing experience, I’d like to see more websites use the iPhone’s GPS to give location-specific content, or use the accelerometer to control a web game. I want to see social networking sites use a gaming console’s owner’s latest scores or screenshots. I want to see cameras use the web to overlay the latest Flickr comments on the pictures you’ve taken or to do augmented reality. I want to see set-top boxes seamlessly mix television content with information from the web. To me, the true potential of having 15 billion internet-connected devices is not 15 billion PC-like devices, but 15 billion devices each with its own features and capabilities.

III. Browser power

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While the Facebooks and Twitters of the world get (and deserve) a lot of credit for driving the Web 2.0 wave of innovation, a lot of that credit actually belongs to the web standards/browser development pioneers who made these innovations possible. Web applications ranging from office staples like Gmail and Google Docs would have been impossible without new browser technologies like AJAX and more powerful Javascript engines like Chrome’s V8, Webkit’s JavascriptCore, and Mozilla’s SpiderMonkey. Applications like YouTube and Picnik and Photoshop.com depend greatly on Adobe’s Flash product working well with browsers, and so, in many ways, it is web browser technology that is the limiting factor in the development of new web applications.

Is it any wonder, then, that Google, who views web applications as a big piece of its quest for web domination, created a free browser (Chrome) and two web-capable operating systems (ChromeOS and Android), and is investigating ways for web applications to access the full processing power of the computer (Native Client)? The result of Google’s pushes as well as the internet ecosystem’s efforts has been a steady improvement in web browser capability and a strong push on the new HTML5 standard.

So, what does this all mean for the shape of “Web 3.0”? It means that, over the next few years, we are going to see web applications dramatically improve in quality and functionality, making them more and more credible as disruptive innovations to the software industry. While it would be a mistake to interpret this trend, as some zealots do, as a sign that “web applications will replace all desktop software”, it does mean that we should expect to see a dramatic boost in the number and types of web applications, as well as the number of users.

Conclusion

I’ll admit – I kind of cheated. Instead of giving a single coherent vision of what the next wave of Web innovation will look like, I hedged my bets by outlining where I see major technology trends will take the industry. But, in the same way that “Web 2.0” wasn’t a monolithic entity (Facebook, WordPress, and Gmail have some commonalities, but you’d be hard pressed to say they’re just different variants of the same thing), I don’t think “Web 3.0” will be either. Or, maybe all the innovations will be mobile-phone-specific, context-sensitive, super powerful web applications…

(Image credit) (Image credit – PhD comics) (Image credit – mobile phone) (Image credit – Browser wars)

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Too Many Cooks

Every company that is successful eventually runs into a problem which my favorite business-comic strip Dilbert pokes fun at in the two latest strips:

(from Nov 20)image

(from Nov 21)image

Think about it. How many large companies do you know of where there isn’t a massive layer of mysterious “vice presidents” (or some other equally meaningless-sounding title of doubtful seniority)?

This isn’t to say that all these positions are filled with useless people, or that distinctions like “senior vice president” and “executive vice president” and “associate director” aren’t important, but this proliferation of senior-sounding titles is indicative of companies facing a “mid-life crisis”, where the promise of massive growth and exciting future job prospects are no longer certain enough in order for a company to retain all of its talent.

As a result, companies are forced to create these new levels of management to keep their good people, either because there are not enough positions of seniority for these people to be promoted into or because they are being drawn by other companies/competitors who have already made the jump into “vice president land”.
This practice, in and of itself, is not in and of itself a bad thing. After all, why shouldn’t a successful company make a minor concession like this to retain talent? But, the problems emerge when:

  • These new positions add new layers of bureaucracy that muddy up what used to be a very clear decision-making process and make the company less agile
  • These new positions create “organizational bloat” — where costly and inefficient “manager” positions are created which don’t actually manage anyone or which manage departments/groups of little value
  • These new positions allow senior managers to play politics with promotions and/or lower promotion hurdles, lowering the talent/efficiency of the company overall

While there is no easy way to tackle all of these issues (and, in my mind, the fact that companies feel they have to create these new “vice president” positions feels like a cheap cop-out to me), it is something for all general managers/consultants to be aware of as many companies suffer from the dilemma of keeping a company lean and efficient and yet retaining the talent/size that they need to grow.

(Image credits – Dilbert)

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Schering-Plough says goodbye via analyst call

image If you follow the biopharma sector at all, then you’ll know one of the most noteworthy deals to be announced in recent months is the $41 billion deal where Merck will buy former rival Schering-Plough.

With the deal closing soon, Schering-Plough’s execs had to deliver one last earnings call with the analyst community which cover Schering-Plough stock.

Generally, these are very dry affairs full of corporate speak with many empty promises, excuses, and boasting (although, occasionally, if you have an interesting enough CEO like NVIDIA’s Jen-Hsun Huang, you get some very interesting commentary). But, this most recent analyst call had a bit of poignancy you don’t usually get in an analyst call, as covered by the Wall Street Journal Healthcare blog:

The earnings call’s invariable bleating about operational sales growth and foreign exchange impact came with notes of nostalgia… Analysts offered kind good byes and good lucks. Executives waxed about the company, and its pipeline of new drugs, that they had built. It will all go to Merck now, Chief Executive Fred Hassan said in closing.

Awwww. Adios, Schering-Plough.

(Image credit – Merck/Schering Plough)

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Innovator’s Business Model

image A few weeks back, I wrote a quick overview of Clayton Christensen’s explanation for how new technologies/products can “disrupt” existing products and technologies. In a nutshell, Christensen explains that new “disruptive innovations” succeed not because they win in a head-to-head comparison with existing products (i.e. laptops versus desktops), but because they have three things:

  1. Good enough performance in one area for a certain segment of users (i.e. laptops were generally good enough to run simple productivity applications)
  2. Very strong performance on an unrelated feature which eventually will become very important for more than one small niche (i.e. laptops were portable, desktops were not, and that became very important as consumers everywhere started demanding laptops)
  3. Have the potential to improve by leveraging their industry learning curve to the point where they can compete head-to-head with an existing product (i.e. laptops now can be as fast if not faster than most desktops)

But, while most people think of Christensen’s findings as applied to product and technology shifts, this model of how innovations overtake one another can be just as easily applied to business models.

A great example of this lies in the semiconductor industry. For years, the dominant business model for semiconductor companies was the Integrated Device Manufacturer (IDM) model – a business model whereby semiconductor companies both designed and manufactured their own product. The primary benefit of this was tighter integration of design and manufacturing. Semiconductor manufacturing is highly sophisticated, requiring all sorts of specialized processes and chemicals and equipment, and there are a great deal of intricacies between one’s designs and one’s manufacturing process. Having both design and manufacturing under one roof allowed IDMs to create better products more quickly as they were able to exploit the interplays between design and manufacturing and more readily correct problems as they arose. IDMs were also able to tweak their manufacturing processes to push specific features, letting IDMs differentiate their products from their peers.

image But, a new semiconductor model emerged in the early 1990s – the fabless model. Unlike the IDM model, fabless companies don’t own their own semiconductor factories (called fabs – hence the name “fabless”) and outsource their manufacturing to either IDMs with spare manufacturing capacity or dedicated contract manufacturers called foundries (the two largest of which are based in Taiwan).

At first, the industry scoffed at the fabless model. After all, these companies could not tightly link their designs to manufacturing, had to rely on the spare capacity of IDMs (who would readily take it away if they needed it) or on foundries in Taiwan, China, and Singapore which lagged the leading IDMs in manufacturing capability by several years.

But, the key to Christensen’s disruptive innovation model is not that the “new” is necessarily better than the “old,” but that it is good enough on one dimension and great on other, more important dimensions. So, while fabless companies were at first unable to keep up in terms of bleeding edge manufacturing technology with the dominant IDMs, the fabless model had a significant cost advantage (due to fabless companies not needing to build and operate expensive fabs) and strategic advantage, as their management could focus their resources and attention on building the best designs rather than also worrying about running a smooth manufacturing setup.

The result? Fabless companies like Xilinx, NVIDIA, Qualcomm, and Broadcom took the semiconductor industry by storm, growing rapidly and bringing their allies, the foundries, along with them to achieve technological parity with the leading IDMs. This model has been so successful that, today, much of the semiconductor space is either fabless or pursuing a fab-lite model (where they outsource significant volumes to foundries, while holding on to a few fabs only for certain products), and TSMC, the world’s largest foundry, is considered to be on par in manufacturing technology with the last few leading IDMs (i.e. Intel and Samsung). This gap has been closed so impressively, in fact, that former IDM-technology leaders like Texas Instruments and Fujitsu have now decided to rely on TSMC for their most advanced manufacturing technology.

To use Christensen’s logic: the fabless model was “good enough” on manufacturing technology for a niche of semiconductor companies, but great in terms of cost. This cost advantage helped the fabless companies and their allies, the foundries, to quickly move up the learning curve and advance in technological capability to the point where they disrupted the old IDM business model.

This type of disruptive business model innovation is not limited to imagethe semiconductor industry. A couple of weeks ago The Economist ran a great series of articles on the mobile phone “ecosystem” in emerging markets. The entire time while I was reading it, I was struck by the numerous ways in which the rise of the mobile phone in emerging markets was creating disruptive business models. One in particular caught my eye as something which was very similar to the fabless semiconductor model story: the so-called “Indian model” of managing a mobile phone network.

Traditional Western/Japanese mobile phone carriers like AT&T and Verizon set up very expensive networks using equipment that they purchase from telecommunications equipment providers like Nokia-Siemens, Alcatel-Lucent, and Ericsson. (In theory,) the carriers are able to invest heavily in their own networks to roll out new services and new coverage because they own their own networks and because they are able to charge customers, on average, ~$50/month. These investments (in theory) produce better networks and services which reinforce their ability to charge premium dollar on a per customer basis.

In emerging markets, this is much harder to pull off since customers don’t have enough money to pay $50/month. The “Indian model”, which began in emerging countries like India, is a way for carriers in  low-cost countries to adapt to the cost constraints imposed by the inability of customers to pay high $50/month bills, and is generally thought to consist of two pieces. The first involves having multiple carriers share large swaths of network infrastructure, something which many Western carriers shied away from due to intellectual property fears and questions of who would pay for maintenance/traffic/etc. Another plank of the “Indian model” is to outsource network management to equipment providers (Ericsson helped to pioneer this model, in much the same way that the foundries helped the first fabless companies take off) — again, something traditional carrier shied away from given the lack of control a firm would have over its own infrastructure and services.

Just as in the fabless semiconductor company case, this low-cost network management business model has many risks, but it has enabled carriers in India, Africa, and Latin America to focus on getting and retaining customers, rather than building expensive networks. The result? We’re starting to see some Western carriers adopt “Indian model” style innovations. One of the most prominent examples of this is Sprint’s deal to outsource its day-to-day network operations to Ericsson! Is this a sign that the “Indian model” might disrupt the traditional carrier model? Only time will tell, but I wouldn’t be surprised.

(Image credit) (Image credit – Foundry market share) (Image credit – mobile users via Economist)

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