One more cheer for the FSF

In noting the improvements in the latest draft of GPLv3, there is one I missed: dropping the SaaS compulsory sharing. Blogger Fabrizio Capobianco is ranting that the latest draft ruins the GPLv3, which he had counted on closing the “ASP loophole.” Matt Asay is drinking Fabrizio’s Kool-Aid® (or Pellegrino, or [fill in appropriate metaphor here]).

Messrs. Capobianco and Asay think it’s terrible that companies can bring open source in house, use it to offer services over the web, make their own changes and not give back those changes. (Think Google). The GPLv2 defines distribution as, well, distributing your software, so offering services that run on that software doesn’t trigger the compulsory sharing provisions. (If you haven’t been down this path, see Larry Rosen’s book in my OSS bibliography, or the GPLv2 chapter available free online).

At one point, GPLv3 was intended to trigger the GPL’s distribution clause with online services (such as ASPs and Software-as-a-Service), with the intention that any company using GPLv3-licensed code to deliver services would have to make their changes available to the rest of the world. As I found in my consulting practice, such mandatory disclosure would be a great benefit to dual license companies, because it would add one more hassle to slow competitors and force people to pay up.

Today a few diehards are annoyed that Google, Amazon and others run Linux server farms and don’t share their changes. But five years ago, they were desperate for such validation, and later proud that such (oxymoron alert) blue chip dot-coms endorsed a community-developed technology as suitable for the most demanding mission-critical IT operations.

Suppose Linus Torvalds agrees to the GPLv3 (his big issue seems to the anti-DRM clauses of the previous draft). Suppose the GPLv3 does “close the ASP loophole,” requiring Google etc. to share their changes with the world. So what will happen? Perhaps some would share their changes.

But I also think there would be a resurgence of interest in technologies made available under more open licenses (i.e., without compulsory sharing). Things like OpenBSD or FreeBSD might suddenly get popular again. Or the companies using the existing Linux under GPLv2 could just decide not to take any updates under the new license. In a free market, the decentralized choices of private actors are frustrating to social planners: when people have choices, they’ll do what’s in their own self-interest, not what the social planner wants them to do.

The FSF seems to be reacting realistically to market signals, despite what some of its idealist supporters would want it to do. It deserves to be commended for such pragmatism, because dealing with the world as it is will be a far more effective strategy in the long run.

Technorati Tags: Google, GPL, open source licenses, SaaS

FSF seems to listen

In response to criticism of the earlier drafts of GPLv3, on Wednesday the Free Software Foundation announced a third draft of the proposed GPLv3.

Linus Torvalds, who hated the previous draft, seems to find this one much improved, particularly on the patent retaliation clause 7(b). While he seems unconvinced that it’s better than GPLv2, he’s now willing to consider migrating the Linux kernel over to v3.

Of course, more aggressively protecting free software users from software patents is one of the major goal of the GPLv3. FSF “licensing compliance engineer” Brett Smith notes that the latest draft was deliberately crafted to undercut the Microsoft-Novell deal and its controversial terms about patent indemnification.

The FSF claims is this is the penultimate draft — to be discussed for 60 days — followed by the final draft open for discussion for another 30 days. They really want this train to leave the station in 2007, whether or not everyone is on board.

Still, given the tendency of the FSF and its supporters to be ideologues (or “purists”) in opposition to the broader “open source” community, the willingness of the GPLv3 license developers to listen and respond to external criticisms is an encouraging sign.

Technorati Tags: GPL, Linus Torvalds, Linux, open source licenses

Diversified embarrassment risk

After rah-rah enthusiasm during the 1960s and early 1970s, the strategy of unrelated diversification has fallen out of favor with strategists and financial markets. GE nothwithstanding, it’s been shown that firms waste a lot of managerial time trying to manage disparate businesses that have no synergies, and that stockholders can better diversify risk by buying their own shares in the underlying businesses. Such unrelated diversification still remains a pattern in countries where the aggregate market power overrules the underlying inefficiences, such as Korea’s chaebol and (until recently) Japan’s kigyō shūdan.

Today, the Wall Street Journal published a list of companies doing business with Iran to help finance its oil and gas development. American frustration with Iran is building since it seized 15 British sailors and Marines on March 23, and some in the Senate are proposing a boycott of firms that do any business with Iran.

Most of the companies on the WSJ list are energy companies, but one jumped out — Korean conglomerate LG. The LG Group doesn’t have much (any?) petrochemicals presence in the US, but instead it sells a lot of LCD screens via its joint venture with Philips. More visibily, its LG Electronics subsidiary is the world’s fifth largest maker of cell phones (at about 6% in 2006) and the largest maker of CDMA handsets.

LG has a potential exposure here, but it’s not clear how big. Right now, the US pressure on firms doing business with Iran is fairly weak: it’s not clear whether the ultimate pressure will begin to resemble the (successful) anti-apartheid divestment efforts of the 1980s, or whether it will just fizzle out.

In some cases, the risk of scandal in a diversified company is severe. The broad portfolio of clients (not technically diversification) held by Arthur Andersen & Co. proved to be its undoing, as the choice of one particular Houston-based company proved fatal. However, as a “Big Five” accounting firm, Andersen was in the business of renting its previously stellar reputation to validate the financial statements of public firms, so once it lost its reputation it had nothing. Obviously thousands of former Andersen employees wish that the Houston office had not taken that client (or had done a better job of protecting Andersen's storied 90-year-old reputation). And the damage to the Andersen brand accelerated the decision of its Andersen Consulting spinoff to rebrand itself as Accenture.

LG won’t face such a consequence, if for no other reason than the Korean government won’t allow it to happen. If the pressure increases, the RoK government will probably try to protect LG rather than a more pro-active strategy such as separating the electronics and petroleum companies into separately traded firms.

Also this week, the diversified company ITT was fined this week for transferring military technology to China. Given that Loral survived (despite bankruptcy) after transferring ballistic missile technology to China, ITT is likely to skate after paying its $100 million fine for the night-vision goggle technology.

Technorati Tags: LG, mobile phones, diversification

Who runs the Linux Foundation?

The Free Standards Group has finished its friendly bailout of Open Source Development Labs, with the announcement Tuesday of election results for the Linux Foundation merged board of directors. The result seems to be an entity that is governed according to the FSG, but run more by the OSDL than the FSG.

The old FSG board had 9 members, and the OSDL board had 14 (later 12) members. The carryovers to the 14-member 15-member LF board are unsurprising:

• James Bottomley (SteelEye), Dan Frye (IBM), Hsashi Hashimoto (Hitachi) and Tsugikazu Shibata (NEC) from the OSDL board;
• Mark Shuttleworth (Ubuntu) and Andrew Updegrove (law firm Gesmer Updegrove) from the FSG board;
• Masahiro Date (Fujitsu) and Markus Rex (Novell, formerly of SuSE) from both boards; and
• Doug Fisher of Intel, replacing two Intel representative: Fisher (former OSDL chairman) and Dirk Hohndel (of FSG)

Slightly more interesting are a few new faces:

• Christine Martino of HP replaces Steve Geary of HP from both boards;
• Wim Coekaerts, the main Linux person at Oracle;
• Christy Wyatt of Motorola;
• Tim Golden of Bank of America;
• Brian Pawlowski of NetApp; and
• Marc Miller of AMD. This never would have happened at OSDL with Intel as one of its key founders and one of the largest (if not the largest) investor.

The most interesting to me were the names that were dropped:

• From FSG: Theodore Ts'o (top Linux lieutenant) and two nonprofit reps, Jim Lacey of the Linux Professional Institute and John Weathersby of the Open Source Software Institute;
• From OSDL: Stuart Cohen (who quit as CEO in December), his predecessor Jerry Greenberg (ex-TurboLinux, later OSDL CEO from 2002 to 2003), Larry Augustin (founder of VA Software), and Frank Fanzilli (retired CIO of CSFB).

The LF board looks very very corporate, with the same heavy Japanese representation as OSDL. The LF did away with the two dedicated non-profit seats, although it keeps three at-large seats; the remaining seats are reserved for paying members. As with FSG, there are tiers of members and directors, and in fact the LF retains the same membership tiers (and the website still lists the same members) as the FSG. However, the election doesn’t seem to conform to the Linux Foundation bylaws.

The eight Platinum members who pay $500k/year are each guaranteed a seat, which explains the holdovers (Fujitsu, Hitachi, HP, IBM, Intel, NEC, Novell) and the new Oracle rep. The Gold members who pay $200k/year are promised three seats: AMD, NetApp and BofA Motorola. The Silver who pay $20k/year get one director, apparently BofA. And then the three at large directors: one required by the bylaws to represent the technical advisory board (Bottomley) and two other at-large directors (Shuttleworth, Updegrove).

Another measure of who won the merger is infrastructure. The directory structure of www.Linux-Foundation.org is that of the old www.FreeStandards.org, and the LF headquarters is in San Francisco (as in FSG) and not Oregon (as was OSDL).

Update 8:30 p.m.: Mea culpa. I had several initial mistakes which led me to believe there was a gap between the bylaws and the new directors. The StandardsBlog posting omitted Wyatt of Motorola (a Gold member) and thus implied there were 14 members; the official press release is complete. Amanda McPherson of LF e-mailed to clarify that BofA is a Silver member (although they are still not listed among the official members on the website.)

Technorati Tags: consortia, Linux, open source, standardization

Content that actually belongs on YouTube

While the 1998 DMCA was intended to limit the threat of Napster, there have been ongoing complaints about its excesses.

One of the major areas of controversy was the (likely intentional) effect of DMCA of swinging back the pendulum against established consumer “fair use” rights. The case law (and policy tradeoffs) around fair use are complex, but two important examples of fair use exceptions are for public policy debates and for scholarship.

The potential of the DMCA to restrict established fair use rights has been highlighted by law school instructor Wendy Seltzer, who deliberately baited the NFL to prove a point. Seltzer used to work for the EFF — a group promoting absolutist cyberlibertarian positions that ignore other equally important public policy goals — but is now affiliated with Harvard’s Berkman Center, which combines advocacy with serious scholarship.

To make her point, Seltzer posted to YouTube a video clip of the now-familiar NFL disclaimer:

This telecast is copyrighted by the NFL for the private use of our audience. Any other use of this telecast or of any pictures, descriptions, or accounts of the game without the NFL's consent, is prohibited.

The NFL demanded that the clip be deleted, which it was; Seltzer sent a Safe Harbor counter-notification provided by the DMCA, and the clip came back up. That should have been the end of it, Seltzer says:

when I sent my counter-notification to the first NFL notice, on February 14, YouTube forwarded it on to the NFL per the DMCA's specification. Since my counter-notification included a description of the clip, "an educational excerpt featuring the NFL's overreaching copyright warning aired during the Super Bowl," it put the NFL on clear notice of my fair use claim.

Instead of seeking a court determination (which Seltzer contends is necessary), the NFL just asked (and succceed) in getting YouTube to pull it again. Seltzer recounts the saga in her blog, as do the AOL sports blog and the WSJ legal blog.

The publicity stunt spotlights that online copyright issues are not just big corporations disseminating commercially valuable content for free. If nothing else, this is helping to bring the policy debate to call attention to the impact on consumer interests.

There are limits to such interests. Many of the 22-year-olds in my classes think they have an unlimited right to download free music forever — not because the law allows it, but because everyone gets away with it so it has become an entitlement (like downloading term papers from the Internet). The opposite extreme is the RIAA suing grandmothers or even the dead.

Right now any business model is at risk if it involves professionally-generated content, either directly or indirectly. As Walt Mossberg observed, legal clarity is sorely needed here for consumers, but this is also something sorely needed by business. The purpose of business regulation is to set rules for fair competition, and right now no one knows what the rules will turn out to be when they are interpreted in a court of law. A lot of litigators are going to get rich off of these ambiguities, an obvious waste of economic resources.

Technorati Tags: Google, DMCA, copyright, YouTube

A few billion beats two years at Harvard

Thirty years late, this June Bill Gates is getting his undergraduate degree from Hahvahd. Except of course it’s an honorary degree he’ll get in exchange for being the commencement speaker.

This is the standard quid pro quo to attract commencement speaker. Of course, Gates has long ties to Harvard. During his 2+ at Harvard (1973-1975), he and classmate Paul Allen used the school’s PDP-10 to write the Basic interpreter that was Microsoft’s first product. They never paid Harvard for the computer time, but in 1996 Gates and classmate Steve Ballmer (A.B., Harvard, 1977) gave Harvard $25 million to build a new computer science building.

Since I became a college professor, I often get hassled by industry friends who say “look at Bill Gates, Steve Jobs and Michael Dell. Why does my kid need an education to succeed?” My own experience is somewhat consistent with that view, after 20+ years as an engineer and manager in software development without any coursework in computers (only an S.B. in meteorology).

My answer is in two parts. First, education increases human capital (teaches you something) and social capital (helps you make connections); that’s why people pay to get degrees. Second, from sitting on both sides of the recruitment table, normally someone who dropped out of college (or didn’t go to college but wants a professional-technical career) sends the signal that you don’t finish things, which is a bad signal to send.

Against this, there are rare times when the opportunity cost of staying in school is very high: Gates, Jobs, and Dell are testament to that, as were a number of entrepreneurs (many of them unsuccessful) during the dot-bomb era. But Steve Wozniak and went back to Berkeley and finished in 1986, while Sergey Brin and Larry Page remain on leave from the Stanford computer science Ph.D. program.

Hat tip to Todd Bishop and his invaluable Microsoft blog.

Technorati Tags: Bill Gates, Microsoft, Harvard

Jeff Immelt’s chump change

The GE annual report came in the mail today. It provided at least a partial answer to my earlier question about its seemingly foolhardy trademark licensing program.

GE had $163.4 billion in 2006 revenues, of which (Note 3) $221 million was licensing and royalties. That’s 0.14%. Other than the discussion of amortizing IP and other intangible assets on page 92, the subject of licensing income did not appear significant enough to mention in the AR.

It’s tempting to think of GE as a company that makes things (like jet engines or locomotives): for this, the infrastructure division pulled in $47 billion in revenues in 2006. But about 38% of its revenues come either from financial services or its 80% share of NBC Universal. Entertainment aside, GE is not historically a major IP company. In its biggest trademark deal, in 1987 it sold the RCA product line to Thomson, which included a royalty-free license to the RCA name. In 2001, Thomson bought all rights to RCA for $6 million.

So why is CEO Jeff Immelt risking brand dilution with its trademark licensing? Maybe he dreams of IP business model margins to match his old buddy Steve Ballmer. Or maybe it’s such a nonentity in the B2C segment (other than white goods) that the risk seems low. Still, protecting the Monogram and Profile profit margins (of nearly $1 billion annually) and market share seem like something worth worrying about.

Technorati Tags: GE, intellectual property, open innovation, trademarks

A matter of Life and death

Life is dead. Again. Not for good, but probably forever.

Of course, many people probably didn’t know that the Henry Luce picture magazine was still alive. Its first run (the one that made it famous) was as a weekly from 1936-1972. Its second run as a monthly was from 1978-2000. Now it’s just a weak knock-off to Parade and a brand to be exploited, and that one will be gone after the April 20 issue. I loved how BrandWeek found this 2006 quote of the Time Inc. COO:

There are no plans to close Life now or in the future.

In retrospect, sounds like W backing Myers, Rummy or Gonzales, or George McGovern standing behind his (first) running mate “1000%.” But then Life sells to local newspapers, and, as everyone has noticed, the Internet is about to finish the job begun by TV forty years ago. If your customers are dying, then it’s hard to make a good business.

The original Life had pictures from a stable of talented photographers, including Margaret Bourke-White and Alfred Eisenstaedt. Eisensatedt is perhaps best known for his picture celebrating the end of World War II. I best remember the magazine for a non-staff picture — the cover of the 1969 special issue that was the first time I saw the color picture of Buzz Aldrin on the moon.

When I was fresh out of college, I wanted to be a news photographer like David Hume Kennerly, who won a Pulitzer for his UPI work in Vietnam and then worked for Time for many years — but became a household name for his book and his work as President Ford’s photographer. Without business experience or training, in 1980 I didn’t fully appreciate that the glory period of still photography (roughly 1850 to 1970) was already past.

Dead Cat Bounce

On Friday, Vonage lost yet another court ruling in its ongoing fight with Verizon, in this case an injunction against operating its service with the infringing patents.

Larry Dignan of ZDNet does a good job of summarizing the issues facing Vonage, while Eddy Elfenbein of Seeking Alpha is ready to pull the plug.

The stock was up slightly today (but of course down 25% on Friday after the news). Perhaps it’s because, as one blogger notes, the injunction won’t be enforced for two weeks. I personally think it’s a dead cat bounce.

Dignan’s online poll asks who will get the business that Vonage loses. One option is to shift demand to other VoIP suppliers. I can’t see how this is a positive for the other VoIP startups, since clearly Verizon and the other Baby Bell are only interested in putting competitors out of business. It may be that the only viable competition comes from P2P services like Skype or A/V instant messaging clients that bypass the PSTN entirely.

Technorati Tags: Baby Bells, patent infringement, Verizon, VoIP, Vonage

New realism in cell phone business models?

Sprint has a cute new convergence phone, the Samsung SPH-m620, which does a better job than most of trying to combine both telephone and MP3 player. Endgadget has a nice album of photos.

That Samsung (#3 or #4 in the world) and Sprint (#3 in the US) are trying to gain traction using an innovative phone is not all that surprising. I was also not surprised by Samsung’s attempt to adopt a more Apple-like product naming strategy with the new “UpStage,” or the complaint by at least one reviewer that they still don’t get software.

But what I found most interesting is that with the phone, Sprint promises over-the-air 99¢ music downloads, in direct competition with the e-commerce site formerly-known-as-iTunes-Music-Store. Sure, if you switch phones or want to play the songs on your home stereo, you’ll wish you had iTunes (or Zune or Rhapsody or Wal-Mart) PC-based downloads. But it’s still much more reasonable than the $1.99 per song of the Verizon V Cast; as an added benefit, it comes without the obnoxious ads. (Yes I know some services allow you to download a song to your PC and a separate copy to your mobile phone, while others allow you to sideload songs from your PC to your phone).

It would be good to see some price competition in music downloading services, if for no other reason than to convince the music industry to give up its long-held fantasy that it can raise digital download prices as an effective strategy for competing with free pirated MP3 files.

Technorati Tags: business models, MP3, music industry, Sprint, Samsung, smartphones

That annoying b---, Dorothy

“Hi guys, this is Dorothy, from The Mortgage Broker.”

When my cell phone rings, it takes me about 3 syllables to recognize this junk call. This time I listened for an extra 10 seconds because I always hang up before the identification of the “company.” I seem to get these calls about once a week, and it’s the only scammer who’s called my cell phone more than once.

Normally I try to avoid off-topic postings, but this is something that affects just about anyone in the US who owns a cell phone. A simple Google search shows that columnists and bloggers have been writing about this for months. It’s been logged on the wonderful WhoCalled.US site under the number I saw, plus a least two other numbers.

People who have looked into this — particularly those on the alleged do not call list — claim it’s illegal. Certainly those stupid enough to buy the “1 percent” mortgage (with an APR including fees likely upwards of 7%) are being misled if not defrauded. And there’s the waste of time and airtime charges, multiplied by millions of victims. The impact of each infraction is fairly small, but the scope of the abuse is huge.

Politicians always like to grandstand about fighting fraud and crime. Why haven’t the NAAGs gone after this scam?

Technorati Tags: mobile phones

Linus again disses GPLv3

In an e-mail interview published Monday by Information Week, Linus Torvalds again expresses his preference for GPLv2 over GPLv3. He lists a number of reasons:

First off, I don’t even know what the GPLv3 will look like. I would be totally crazy to accept a license for my code sight unseen. I think people who just say “version 2 or any later version” on their code probably don’t care about the license of their code enough. Before I say that “yes, you can use my code under license X,” I’d better know *what* that license is.

He lists other points. He thinks the v3 drafts so far are worse than v2, including “glaring technical problems.” But then he gets to the rub:

Finally, the real basic issue is that I think the Free Software Foundation simply doesn’t have goals that I can personally sign up to. For example, the FSF considers proprietary software to be something evil and immoral.

Me, I just don’t care about proprietary software. It’s not “evil” or “immoral,” it just doesn’t matter. I think that Open Source can do better, and I’m willing to put my money where my mouth is by working on Open Source, but it’s not a crusade — it’s just a superior way of working together and generating code.

He also notes that the GPLv2 is about enabling collaboration, whereas the changes in the GPLv3 emphasize what can’t be done (e.g., DRM support).

If the most popular GPL software isn’t going to adopt GPLv3, then it perhaps it is dead on arrival. This is also consistent with the hilarious (albeit understated) rivalry scene with Torvalds and Richard Stallman in the documentary Revolution OS.

Hat tip: Matt Asay and his Open Sources blog.

Technorati Tags: GPL, Linux, open source licenses, Linus Torvalds

Qualcomm news elsewhere

I’ve decided to post all my future Qualcomm-related news at the SD Telecom blog. I hope that this isn’t a brand extension too far, and that’s certainly not the motivation.

Instead, I see the charter of this blog as offering observations about IT firm strategies — theoretical, descriptive and practical. I follow Qualcomm rather closely for my book, to a level of detail that’s probably far beyond the interests of OITS readers.

Still, I imagine the blog (or at least the Qualcomm-related postings) would be of interest to those that care about patents and patent licensing business models.

Technorati Tags: patent infringement, patents, Qualcomm

BNF, F IV, RIP

Off topic, John Backus, a giant of modern computing died Saturday, according to the New York Times. MIT has a brief biography, while there is more detailed information at IBM and his alma mater Columbia.

As the name suggests, Backus is the original of Backus-Naur Form (BNF), familiar to any computer science student who’s seen a formal computer language syntax. (Or even for those of us without formal computer science training who’ve written a language compiler). BNF dates to Algol 60, reflecting the efforts of Backus and Peter Naur. Of course, Algol is the progenitor of B (and thus C, C++ and Java) as well as Pascal (and with it Modula-2 and Ada).

But BNF (aka Backus Normal Form) was the second major contribution of Backus, who later won a Turing Award. In the 1950s, Backus led the IBM team that invented Fortran, the oldest surviving higher-level language. This led to Fortran II, Fortran IV, Fortran-77 and Fortran-99. Fortran-66 (a cleanup of Fortran IV) is claimed to be the first higher-level language standard in the world.

Even though I spent most of my programming career working in assembler or C, Fortran still has both strong sentimental and historical significance to me. Fortran IV was the language I learned in 1971 at the Explorer scout post (at Teledyne Ryan) on the IBM 1130 minicomputer, and the one I used to win the (jr. high) math category of the county science fair.

With Backus gone, there aren’t many comparable pioneers left. Grace Hopper died 15 years ago, while E.W. Dijkstra died nearly 5 years ago and Kenneth Iverson died a few years later. Niklaus Wirth is in his 70s and so may be around a while longer. However, Backus himself argued 30 years ago, that it’s time to move past Von Neumann-style programming languages.

Sun’s Rebound Continues

Back in 2001-2002 when I was researching my second open source article — eventually published in 2003 in Research Policy — I ended up studying three companies: Apple, IBM and Sun. I guess the editors of the special issue liked it because it was one of the first academic articles to treat open source as a corporate strategy rather than merely a way of collaborating to produce technology.

The Apple and IBM strategies were relatively straightforward. Not surprisingly, Apple was selectively open — what I called back then “opening parts.” And, as will be familiar to anyone today, IBM is cross-subsidizing “free” (whatever that means) software with expensive hardware and services.

I never quite got Sun. On the one hand, they had claimed to be about “open standards” for decades, and had promulgated a few pieces of code (like NFS) for the rest of the world to enjoy. On the other hand, they had been at the center of the Unix wars and (like all the other Unix vendors) wanted a few little switching costs to make it more likely enterprise customers would stay with them. So when it came to open source, Sun’s strategy 5 years ago had an element of ambivalence to it. Meanwhile, in the post-bubble era IT managers who preferred Sun’s elegant systems went out and bought Lintel boxes because they were good enough.

Under Jonathan Schwartz, the company has been more aggressively open in its IT strategies — which is risky, but it was clear the old cautious approach to wrenching industry change was on a terminal glide slope. They started the process of open sourcing Solaris in 2004 — nearly 5 years later than when it would have really mattered, but still a positive step to deal with the flood of industry change.

Today, Ian Murdock joined Sun Microsystems to, as he says, both help it respond to Linux and also to work more closely with it. He is the “ian” in Debian, former CTO of the Linux Foundation (née Free Standards Group) and apparently a longtime Unix fanatic and Sun fan. While it’s initially impossible to distinguish a symbolic hire from a substantive one, Sun’s ability to attract Murdock and its (presumed) willingness to listen to his ideas is a positive sign for a company that several years many gave up for dead. Perhaps they’ll enjoy an Apple-like revival.

Technorati Tags: Linux, open source, open standards, Sun Microsystems

What’s open about Open Source?

At a conference in January, Michael Tiemann got mad at me for one slide suggesting open source was antithetical to profits. In trying to flip 14 slides in 12 minutes on a complex topic, I was grossly oversimplifying, and I grudgingly conceded that my point (that many FSF-types don’t want money made off of software) could be misinterpreted, although I don’t think that’s true of the written version.

Friday I was catching up on other blogs and found Matt Asay’s entry about his own participation in (and endorsement of) the Red Hat Exchange. Now I get Tiemann’s point.

The Red Hat business model has always been about creating switching costs — getting buyers to adopt and find “sticky” the Red Hat implementation rather than embracing a truly open (and thus commoditized) open standard. Red Hat Exchange they have added vertical integration as well: a one-stop shopping for support for a wide range of open source packages. This seems to be in competition with IBM, which might seem strange since in 1999 IBM put them on the map. OTOH, Microsoft and Intel didn’t pay a price for ingratitude, either.

In our research on Linux adoption, Jason Dedrick & I found that Red Hat buyers ascribed an option value (in the sense of a stock option) to the possibility of getting an alternate supplier for Linux — something they obviously didn’t have with Windows. But if this is an option that is never exercised — or from a practical standpoint, can’t be exercised due to “stickiness” around the service offering — how is Red Hat’s business model different from Microsoft’s? Other than they only have to pay for roughly 13% of their R&D instead of 100%?

I’m surprised that the Microsoft-like property of Red Hat wasn’t mentioned by Matt — who competed with Red Hat when he worked for Novell (until he bailed), and who’s thought more about open source business than anyone I know in industry. Certainly the possibility of Red Hat as the next Microsoft is oft-reported news — in 1999, several times in 2002 (at NewsForge, eWeek & ZDNET) and earlier this week — as well as Red Hat’s stated ambition. Larry Ellison doesn’t think it will happen, but then Larry’s not God.

Is Red Hat one of a kind, or leading the way for a whole wave of not-very-open “open source” business models? Open standards (when they worked) were about low switching costs, and thus about choice. Is “open source” destined to become just a marketing slogan, akin to OpenVMS?

Technorati Tags: business models, Linux, open source, Red Hat

WebEx 2D vs. 3D

This morning’s paper brought the news of Cisco’s $3.2 billion purchase of WebEx. John Fontanna of Network World sees it as a direct confrontation with Microsoft, while Tom Keating thinks Cisco overpaid. With Cisco paying $57/share, clearly it would have been cheaper in January 2006 (at $20) or four years ago (at $8).

It’s impossible to drive in Silicon Valley without seeing the WebEx sign, but I must be the only techie in town that never had a need for their service. Part of it is that (while they have a Macintosh-friendly management team) they ignored the Mac until 2003. A textbook publisher has been dunning me for years to attend their WebEx-hosted webinars and this year WebEx themselves started spamming me (at a .edu?) to sign up for their service. I certainly have done a large amount of virtual work in the past 15 years, including three years of teleconferences as an HP supplier. But today, Skype or iChat handles my basic teleconference or videocall needs well enough — it’s hard to justify paying more than free.

But now there’s a 3D challenger to WebEx with Palo Alto-based Qwaq, although I’m hardly a neutral observer. More than 15 years ago, I met its founder, David Smith,, when we were peddling our respective (award-winning) Mac CAD packages — he with Virtus Walkthrough and me with PLOTTERgeist. After publishing Tom Clancy-licensed videogames, for the last five year David has been working with Alan Kay and others to develop the Smalltalk-based, open source 3D platform called Croquet. With an active university research community behind it, Croquet has solved a number of difficult problems, including distributed asynchronous computing, being able to patch a running system, and virtual privacy issues.

A year ago, David & I reconnected on a panel discussion at UC Berkeley and he spoke to my MBA technology strategy class about his ideas of making a commercial product layered on Croquet. Last month I met Qwaq CEO Greg Nuyens, who explained the informal tagline is “WebEx meets Second Life.” This week, Qwaq came out of stealth mode.

Qwaq has a ways to go to catch either WebEx or Second Life, but they have some key opportunities. Versus Second Life, they bring a business-oriented, “behind the firewall” enterprise offering. Versus WebEx, they offer a compelling virtual presence. The key feature that I (and others) think is a winner is persistence, e.g. having a virtual war room where you can resume a meeting with all the documents on the wall where you left them. Blogger Steve Borsch thinks such asynchronous collaboration is essential for virtual distributed work. (Borsch claims to have grokked Adobe’s Carousel back in 1991, when I wondered what they were smoking).

Several of the bloggers remark on the benefit to users of having Qwaq Forums built upon an open source (and thus open API) base. Is this merely a theoretical advantage (like the idea of switching from Red Hat Linux) or will competitors or customers actually use these APIs? This is a persistent issue in open IT strategies, but I don’t understand this “space” well enough to know the answer.

Technorati Tags: virtual reality, videoconferencing

Lots of IP news today

Three news items I saw today related to past, present or future IP litigation in the IT industry:

1. By now, everyone’s heard about how Viacom wants $1 billion from Google for copyright infringement. Apparently they don’t buy the GooTube business model either. Donna Bogatin, who claims to have predicted this before the YouTube acquisition, seems sanguine there will be a labor-efficient technical fix (i.e. digital watermarks). I’m not so sure.
2. After losing a patent lawsuit to Verizon, Vonage must be looking for a win somewhere. But here’s one award Vonage doesn’t want: worst one-year performance for a 2006 IPO (down 75%). Somehow, saying shareholders could have lost 96% doesn’t lessen the pain.
3. The looming Nokia-Qualcomm showdown over Nokia’s expiring CDMA license, which was a major topic at the Qualcomm shareholders’ meeting.

I spent the day at the Qualcomm meeting, so I haven’t kept up on the news, but thought I’d mention all three. I expect to have more to say on the Qualcomm-Nokia case when I can offer more specific observations.

Technorati Tags: Google, intellectual property, Nokia, Qualcomm, Vonage

GE: Is 3 less than 2?

As a mass market item, the digital camera enjoyed double digit growth from 1997-2005. But last year, US sales were up only 5% and IDC projects they will be flat at 30 million in 2007. In undergraduate strategic management, this is the classic definition of a looming shakeout, and in fact that’s what analysts are expecting. Also, camera phones have become an even more popular substitute, since nearly half of last year’s billion cell phones were camera phones.

In Michael Porter’s five forces model, an industry facing flattening growth, strengthening substitutes and high rivalry quickly watches profits disappear, and so it’s just about the worst possible time to enter. (Only a period of absolute decline would be worse). So I was really surprised to discover over the weekend that General Electric decided to announce its first digital cameras at last week’s annual PMA Show.

The announcement made so little sense that I spent several hours trying to find out more, not only surfing the web but asking my some of my colleagues in our strategy group. Like most strategy professors, we teach GE as an unusual case of unrelated diversification, and often quote Jack Welch’s famous dictum, paraphrased as “every business unit should be number one or number two in its market, or get out.”

The digicam market is already crowded with firms leveraging other competencies. Of the eight companies last year with market share over 5 percent, all have some form of related diversification:

• camera companies Canon (#1), Nikon (#4) and Olympus (#6) obviously know something about making and selling cameras;
• consumer electronic companies Sony (#2) and Samsung (#7) make high-volume consumer electronics products;
• scanner/printer company HP (#5) has experience in color management, imaging and software; and
• film companies Kodak (#3) and Fuji (#8) have top color scientists, a strong motivation to stay in photography, and at least some exposure to the camera industry with low-end cameras and disposables.

Shipping a digicam has historically been easy because of the opportunities for open innovation, by sourcing components or even whole cameras. Kodak partnered with Chinon to develop both the first consumer digital camera (for Apple in 1994) and its subsequent products, while HP entered by relabeling Pentax cameras. On the other hand, many early entrants have already given up or fallen out of the running.

Other than a love for diversification, what does GE bring to the table? After all, enforcing Welch’s dictum they dumped their consumer electronics division on Thomson in 1987. Sure, the generic GE brand was ranked #4 last year. But when I consulted the most frequent photographer in our household, my better half’s initial reaction was “neutral-to-negative” on a GE digital camera. Why? “I’ve never heard of GE doing anything with cameras.”

It turns out there’s less there than meets the eye. A GE camera has barely more to do with GE than a Polaroid camera has to do with Polaroid. GE wants to make a quick buck licensing its name, and has a smidgen of technology from its medical imaging group. The cameras are designed and sold by a new company called “General Imaging,” reflecting the ego and determination of its CEO Hiroshi Komiya. Komiya’s claim to fame is that was at the helm when Olympus led the ranks of digicam makers in 1996, before the market took off. Olympus remained #1 with 20+% share through 1998, but then was passed by Canon, Sony and Kodak. For the past five years, Olympus has had trouble making a profit and its digicam market share is now 6% and falling.

After retiring from Olympus in 2005, last summer Komiya decided to re-enter the maturing market. The company’s press release details the hubris:

Komiya said his goal is to be among the top three camera brands in the world within five years. “We believe digital cameras are still in a growth market,” he said. “With the replacement cycle now down to three years, many consumers are buying their second or third digital camera, while others have been waiting for just the right camera to come along to make their first purchase. With our excellent quality, advanced features, strong value proposition and the great GE name, we are in a position to lift the entire category.”

Even making #3 would not meet the Welch standard. And with minimal trepidation, I predict that General Imaging will never hit double digits, let alone the 15% it would take to be #3. Meanwhile, as
Business Week warns:

The licensing deal itself is raising questions as to whether GE might, in the long term, actually jeopardize its brand—one of top four most trusted brands in America—by expanding its consumer-electronics licensing program.

Today, GE has six consumer-electronics licensees, which make everything from phones to Web cameras to Christmas lights. The $163 billion company earns an estimated $250 million from those deals, according to Nick Heymann, an analyst with Prudential Equity Group. Sure, the company has few costs associated with its licensee sales, and licensing is commonly viewed as money that falls right to the bottom line. But if the General Imaging business—or another new licensee—were to run into problems, that could hurt the GE brand.

Technorati Tags: commoditization, digital cameras, GE, open innovation, diversification

Hoisting Steve on his own petard

In response to Steve Jobs’ call to abolish DRM, an anti-DRM group affiliated with the Free Software Foundation has called his bluff. Their petition calls on Jobs and Apple to

1. Drop FairPlay protection (DRM) for independent artists on the iTunes Store;
2. Drop DRM for Disney movie and video downloads;
3. Fund an anti-DMCA lobbying campaign.

I think the plan is about as plausible as Al Gore investing in a Chinese coal-fired power plant, but as guerilla theater it’s pretty clever.

Hat tip to Jason O’Grady.

Technorati Tags: DRM, intellectual property, music industry, movie industry, Steve Jobs

The “GooTube” Business Model

After taking it easy on work for a few days, I’m trying to get caught up. So I still have a large blog backlog.

Perhaps the most widely discussed Silicon Valley story of 2006 was Google’s acquisition of YouTube. YouTube was 20 months old, had 19 employees, never made money, and had huge (and rapidly increasing) infrastructure costs, but they still got nearly $1.8 billion in Google stock, creating two new centimillionaires. Even more oft-remarked here is that Sequoia Capital got a 40x return in less than a year — as opposed to waiting 5 years for the 400x return on their 1999 Google investment.

Two of the key questions about the acquisition are how will Google make money off the deal? And how will they handle the issue that their most-watched content is no more legal than Napster?

I could comment on this (and may), but today I found perhaps the definitive source of commentary: the blog of Mark Cuban. OK, he’s biased: near the peak of the dot-com bubble, in 1999 Cuban sold Broadcast.com to Google’s rival Yahoo for $5 billion, and remains a billionaire with his own basketball team.

Still, Cuban has been offering an industry insider’s perspective on what he calls “Gootube,” identifying the treacherous shoals that Google must navigate to avoid making entertainment industry lawyers even richer. His comments in just the last month have included:

• Thursday’s post about what he would hope to learn by subpoenaing YouTube customers;
• How the Oscars could have made money off of YouTube without its cooperation;
• Google’s minimal compliance with the DMCA by only filtering copyrighted content upon complaint.

As a Google user, I like that Google’s (text) search model has the largest possible supply of content. As someone who teaches intellectual property and strategy, I can’t figure out how its opt-out policy towards distributing others’ IP fits under US copyright laws.

Graphic credit: blog.webvideozone.com

Technorati Tags: business models, Google, intellectual property, video

Clearwire 1, Shareholders 0

In response to my earlier posting on WiMax startup Clearwire, the company sold about 15% of its shares, netting $559 million in its Thursday IPO, by pushing 24 million shares instead of 20 million. The stock fell both Thursday and again Friday, meaning those who paid $25 at the IPO have already lost 11.4% of their initial investment.

Interestingly, 20 months ago the company got $900 million in strategic venture capital, including $600 million from Intel. One thing I had missed was the lopsided voting rights of the founder and strategic investors, as reported by Bloomberg:

Clearwire will have two classes of stock, a format used by some companies to ensure that founders keep control. Class A shares, which will be offered to the public, will have one vote each. Class B shares will have 10 votes. McCaw controls 52 percent of the votes, according to the filing.

Wireless Week reports that the net voting shares are McCaw 49%, Intel 30% and Motorola 4%. Other shareholders are clearly just along for the ride, and so far it hasn’t been pretty.

Technorati Tags: broadband, Intel, IPO, WiMax

V is for Victory

In Virginia, Verizon declared Victory over Vonage in VoIP patent fight. The jury said Vonage infringed three (of seven) patents contested and owes $58 million in back royalties.

There’s likely more bad news for VoIP startups down the road. Verizon (two former Baby Bells plus GTE) only owns a few of the patents around switched telephony; we should expect the rest of ol’ Ma Bell to be quickly behind: SBC (now “the new AT&T”) and the ever-litiguous Alcatel-Lucent. A non-Bell, Sprint has already sued Vonage.

The jury’s award of a 5.5% ongoing royalty for three patents seems pretty high. As best I can tell (the coverage isn’t very precise), the three patents cover connecting an Internet and PSTN phone call, call waiting and WiFi calls. The rate is more than charged by the much-villified Qualcomm for licensing its 1000+ patents — royalties going to the company that invented CDMA.

Of course, Verizon’s real concern is not earning a royalty, but putting Vonage out of business so it can get back the 600,000 customers that it lost to Vonage. The Baby Bells are trying to hassle or litigate all the VoIP startups out of business, much as Ma Bell used FCC proceedings in an (unsuccessful) attempt to keep out mobile phone competitors. This is just a replay of the story from mobile handsets, where Ericsson used patents to put Sendo out of business.

When it comes to patents in ICT (and consumer electronics), there seem to be three camps:

1. The have-nots (like open source hackers, VoIP companies, many Taiwanese or Chinese companies) who want to offer cheap stuff and not pay a penny in royalties.
2. The big boys (like Ericsson, Verizon) who are eager to use patents as a barrier to new firms but expect to avoid paying royalties themselves through use of cross-licenses.
3. The toll collectors (Fraunhofer-Thomson, Lucent, InterDigital) who want to make money off of IP rather than products.

Some firms are harder to classify: Microsoft and Qualcomm combine the 2nd and 3rd approaches, using their patents to sell component technologies; IBM’s strategic use of IP belongs in a class of its own.

I used to think that the brewing patent storm could be solved by incremental changes in patent policy — such as the tweaks to patent processes advocated by Adam Jaffe and Josh Lerner. But the onslaught of patents and patent lawsuits under the current system makes that increasingly unlikely.

The US Constitution calls for limited-term grants to “Inventors the exclusive Rights to their … Discoveries.” Patents are supposed to provide incentives for true innovation, so how do you fix the current system without throwing out the baby with the bathwater?

Technorati Tags: business models, intellectual property, Baby Bells, Verizon, VoIP, Vonage

Eric Schmidt Succumbs to Temptation?

Among are many temptations facing big company CEOs are the twin lures of “related” diversification and vertical integration. Both can make economic sense, but they are often pursued for the wrong reasons. Latest rumors suggest that Google CEO Eric Schmidt is succumbing to the latter temptation.

Diversification allows a firm to reuse capabilities — whether R&D and distribution — for other products. HP found a way to make inkjet printers (and repackage laser engines) to the degree that peripheral profits (and market share) dwarf anything it does in PCs. On the other hand, IBM, the biggest computer company in the world found that its sales channel (and cost structure) couldn’t efficiently sell PCs, and so it dumped them after years of losses.

Vertical integration makes sense if you can’t buy inputs (or sell outputs) on the open market. If a company makes mobile phones, perhaps it should make the components or software that go into those phones. Apple created its own retail distribution channel because the existing one was ignoring a platform with 3% market share, but Palm tried the same thing and failed.

When Schmidt got his C.S. Ph.D. from Berkeley, as far as I know he never sat in one of Oliver Williamson’s courses about industrial organization. Maybe that explains rumors that Google is developing its own mobile phone (complete with pictures).

In web services, vertical integration is tricky. If Google starts selling its own client devices, it will be tempted to favor its own client — pissing off makers of rival products and owners of these products. Then owners of Nokia or Apple phones will find Yahoo’s mobile services more attractive than Google’s.

Of course, big company CEOs need revenue and earnings growth to prop up the stock price (and thus incentive compensation). When the core business stops growing, you need to find something else. Google can’t increase its market share in search, so it has to enter new markets.

Perhaps France will finally gain meaningful allies in its Quixotic fight against Google’s PacMan-like quest for total world domination.

Technorati Tags: Google, mobile phones, vertical integration

Microsoft to Publishers: We Share the Same Enemy

As if to contradict my earlier posting, Microsoft has reverted to “the enemy of my enemy is my friend” appeal in reaching out to book publishers by naming their common enemy: Google. There is some logic to this linkage. Conventional software publishers, like book publishers, gained success in the 20th century by using copyright control to assert exclusivity over their content, building barriers to rivals. (However, the Mickey Mouse copyright extension act is mainly about Disney movies, sometimes about music, only rarely about books, and not at all about software).

On Tuesday, Tom Rubin (associate general counsel) gave a speech to book publishers in which he accused Google of having a “cavalier approach to copyright.” Among other examples, he cited the well-known habit of YouTube subscribers posting copyrighted content without permission. Of course, Microsoft’s motives are never altruistic: in this case, it wants book publishers to bless its search approach over Google’s.

Even given the source, he has a point. Google has a business model that assumes “information wants to be free” — and, once free, Google can organize the information better than anyone else and then sell ads around its compilation. But what if copyright owners don’t want their information to be free? With books, YouTube and other areas, Google has adopted an “opt-out” approach that helps its business model but doesn’t really fit copyright law. Sooner or later, Google’s overreach is going to be stopped or slowed (unless it can buy enough Congressmembers to match Disney or the RIAA).

Thanks to Napster — in which de facto realities destroyed de jure copyright protections — the long-term viability of the copyright cartel seems comparable to that of the late 18th Century French nobility. Metaphorically speaking, many heads will eventually roll.

Technorati Tags: business models, Google, intellectual property, Microsoft

Open vs. Profitable Strategies

With my morning breakfast, I happened to read a column on Palm’s current woes in the Wall Street Journal. There was nothing dramatically new, but it provided a nice summary of how they got to where they are. And the stock price results were an eye-opener. Apple has been volatile, but Palm is only a slightly better investment than Iridium.

The article (subscription required) by Robert Cyran of BreakingViews emphasizes the failure of Palm to be proprietary enough. Normally we think of Palm as being a proprietary OS platform, but his view is that being proprietary in one layer is not enough:

How did this happen? In a nutshell, Palm failed to build competitive barriers around its devices, so consumers weren't locked into its products. The Palm Pilot became a dinosaur once cellphones could store contact details and other information. All the data stored on a Palm Pilot was easily transferred to other devices.

(It’s a short article, so under fair use I won’t quote more).

After recounting the fall in market cap from $92 billion to $2 billion, Cyran goes on to praise the Apple moat built using the iTunes Music Store, and Research in Motion (and its BlackBerry product) with its server (and associated services). This is consonant with the advice given by Berkeley’s Carl Shapiro and Hal Varian in Chapter 6 of Information Rules almost a decade ago.

It turns out that the Apple refugees at Palm copied Apple’s old playbook at a time when Apple had to learn a new playbook. Once upon a time, a proprietary platform was enough to extract profitable rents. Now, however, with the co-existence and interconnection of devices (via the Internet, Wi-Fi, etc.), the individual product technology may not matter. The good news is (as I argued four years ago) is that niche platform (like the Mac) can co-exist via open Internet and web standards.

The bad news is that buyers care less and less about the software technology that goes into a phone to make it work, any more than they care about the software technology that goes into a TV or DVD player. Despite new products like HDTV, all vendors get release similar products in parallel and the consumer electronics industry has long-since been in brutal commoditization and price wars. Perhaps a few products can be truly innovative and unique (e.g. the iPhone) but most products are me-too. That would suggest opportunities for pooled R&D, either through a for-profit consortium (like Symbian) or open source done right (which is easier said than done).

Nowadays, it appears that enterprise infrastructure like servers and the associated services have much higher switching costs than client devices and appliances. Addition to RIM and Apple, there’s Microsoft BackOffice, and the granddaddy of them all, IBM Global Services. Of course, the closed interfaces for these servers have gotten Microsoft and Apple in trouble.

Update (4:45pm): Unstrung claims that interest in Palm is fueled by Jeff Hawkins’ mystery device which may not be a cellphone, while PalmAddict says it will be demo’d in May. This would both be an Steve Jobs-style re-invention of Palm, and give Nokia a reason to get involved beyond the phone technology they don’t need.

Technorati Tags: open source, platforms, Palm, smartphones, standards

Who Invented the MP3 Player?

Who invented the modern MP3 player? One claim is Remote Solutions, although the earliest product that had a major impact was the Nomad from Creative Labs. It was Apple’s October 2001 introduction of the iPod that really caused the category to take off, although today there is plenty of competition from Sandisk, Samsung, or even Microsoft.

This morning my friend and co-author Rudi Bekkers forwarded a funny story. (Maybe not as funny as Sunday’s story, but certainly less likely to attract flames). As reported by Endgadget and TechDirt, a new company called “Texas MP3 Technologies” claims that the big players are infringing the MP3 chip technology it bought from SigmaTel.

Whether or not the earlier Alcatel $1.5 billion MP3 royalty award counts as a patent troll, this certainly does.

Technorati Tags: iPod, MP3, patent infringement, patent troll, Samsung