When is a patent not a patent?

A number of businesses depend on IP-based business models, none more so than the pharmaceutical companies. With high up front R&D (and low success rate), the patents support high profits (far in excess of manufacturing costs) that provide the gross margins to support that R&D.

As with any IP-based business model, the model is only as good as the enforcement of the IP right. One of the nastier fights this year has been between Thailand and Abbott Labs, a major drug company headquartered in a Chicago suburb.

Thailand doesn’t want to pay what Abbott wants to charge for its Kaletra AIDS drug, and has threatened compulsory licensing (the traditional approach of developing countries). Abbott did what most such companies do, which is to hold off on introducing new drugs into a country where IP rights are uncertain, bringing an angry response from CalPERS (my pension fund).

Not surprisingly, the Chicago Tribune has done a good job of covering its hometown company, including Abbott’s decision earlier this month to capitulate and unilaterally cut its prices. Roger Bate of the American Enterprise Institute also offered a detailed analysis on April 4, as well as an early report on compulsory licensing. The April 24 Wall Street Journal account is available free (at least for now) at PatentLens.

Monday morning, a Wall Street Journal editorial (registration required) blasted Abbott for its unwillingness to stand on principle, the lack of reaction by the Bush administration, as well as the efforts of the World Health Organization to side with Thailand against Abbott. Their conclusion:

The stakes here are far larger than Thailand's greed and WHO's political opportunism. Anti-pharmaceutical activists have looked for years for a government pliable enough to test WTO rules on compulsory licensing. They want to set a precedent that erodes property rights, with a goal of selling drugs at cut-rate prices everywhere. In the NGO nirvana, governments would share the burden of paying for drug research, and then create some kind of "reward" scheme for companies to innovate. This is socialism as alchemy, as if companies will take billion-dollar risks without an incentive to make a profit.

A few hours later, on Monday afternoon the Bush administration criticized the Thai IP policy (covered by the Chicago Tribune and Reuters). I suspect the shareholders of Abbott (and other pharma companies) wish that it had happened sooner.

I spot-checked three or four IP law blogs, and somehow they didn’t think it worth mentioning. That’s shocking. Among the few to cover it has been Patent Baristas.

The case has repercussions beyond pharma. Thailand is not among those countries best known for nationalizing IP, whether for pharma, software, or other technologies. If Thailand is joining those ranks, it would be a disquieting trend.

Meanwhile post hoc weakening of IP means that economically rational R&D managers have no idea what they’ll be able to recoup of their investments. Given how much California firms (Silicon Valley, SD/SF biotech, Hollywood) depend on IP business models, the decision of CalPERS to back those weakening IP suggests that it’s either stupid or captive to cheap political posturing. (Note: the CalPERS board consists of union-elected trustees along with a few politicians).

Technorati Tags: business models, intellectual property, patents

Vonage fighting for its life

In its ongoing fight with Verizon, Vonage won a temporary reprieve last week from the appeals court. But Vonage has a long road to travel before it’s out of the woods.

With its back against the wall, Vonage is now trying to enlist its 2+ million customers to lobby on its behalf. Below is the e-mail a friend received encouraging her to join a “grassroots campaign.” (Not clear how big Vonage would have to be for this to be an “astroturf campaign.”)

From: Vonage Customer Care <VonageCustomerCare@services.vonage.com>
To: (name deleted)
Sent: Friday, April 27, 2007 4:20:58 AM
Subject: Important News from Vonage

This message contains graphics. If you do not see the graphics, click here to view.

Dear Vonage Customer:

Vonage invites you to be among the first to join a new grassroots campaign aimed at preserving your right to choose your phone service. We’re launching a national movement – Free to Compete – because we believe marketplace competition is good, and we want consumers to have a choice. To learn the facts and find out how you can help preserve competition and your right to choose your phone service, please visit FreeToCompete.com.

Since the day we opened our doors, our mission has been to provide consumers with an alternative to the services offered by entrenched landline phone providers. In our five short years, we've gone head-to-head with many of these industry giants, and amassed 2.4 million customer lines with our innovative technology, cool features and value pricing.

You may have heard that Verizon® is suing us over patents they say we violated. Verizon has pursued litigation against Vonage in an effort to achieve in court what it cannot achieve in the marketplace. The suit could result in limiting competition and consumers' freedom to choose a communications provider, which could ultimately drive up the cost of phone service. Vonage will continue fighting this attempt to limit your choice, while ensuring that you continue to receive the reliable, quality service you've come to expect.

As our customers, you are the most passionate and effective spokespeople we have. Let your voice be heard by visiting FreeToCompete.com. where you can:

1. Send an email to Verizon telling them you support Vonage as they defend your right to a better phone service
2. Sign our Petition
3. Learn the facts of the case
4. Spread the word

We hope you'll join us in taking up this important challenge by visiting FreeToCompete.com. Together, let's move the battle for free competition and choice in the phone industry out of the courts and back into the marketplace!

And thank you for choosing Vonage.

Regards,

Jeffrey Citron
Chairman, Interim CEO and Chief Strategist


VONAGE - 23 Main Street - Holmdel, NJ 07733
Served by PM Digital - 5 Hanover Sq - New York, NY 10004

Technorati Tags: patent infringement, Verizon, VoIP, Vonage

Busy month of traveling

I’m just catching up on my blogging after last week, which marked the beginning of a period when I will be traveling three weeks out of five.

Last week I was in Boston, giving three talks in four days. On Tuesday I started with Chapter 2 from the MIT to Qualcomm book, while on Wednesday I presented one of the iPhone papers. On Thursday, I presented an update to my HICSS paper on open source business models, plus helped my co-author at a “poster” session for Chapter 5 of the aforementioned book.

Next month I’m traveling to Europe for two weeks, to present at the European Academy of Management, to give a couple of guest seminars, and to work with a co-author.

EURAM is interesting this year because of a strong Open Innovation theme. Over at the Open Innovation blog, I’ve posted the schedule for the two tracks, along with an overview. I’ll be presenting a keynote (not yet written) linking OI to other types of openness, as well as an update to the OSS community research jointly authored with Siobhán O’Mahony.

Technorati Tags: conferences, open innovation, open source

Open Innovation at HP

Hewlett-Packard Company (not to be confused with Hewlett-Packard Development Company, L.P.) is one of the foundations of the modern Silicon Valley. Even if you accept the argument of Tim Sturgeon (who I finally met last week) that Silicon Valley began in 1909 with Federal Telegraph, no firm has had a more sustained impact on Silicon Valley than has HP.

Thus, it’s been kinda depressing to watch the company mostly flounder since Bill & Dave left. Once the valley’s exemplar of an empowering corporate culture and engineering-driven innovation, it has been fighting a three front war against irrelevance: the risk that a culture of empowerment becomes one of entitlement, the bureaucratic stultification of any Fortune 100 company, and the disease of management-by-spreadsheets (particularly during the tumultuous reign of Queen Carly I).

How do you shake things up and turn things around? Do you hire from within, which brought us Dick Hackborn (who nurtured the printing cash cow responsibility for the vast majority of HP’s profits over the past 15 years) but also two undistinguished CEOs, John Young and Lew Platt. Hiring from outside brought both Carly Fiorina (a disaster) and Mark Hurd (for whom the jury remains out).

Today the Merc (dead tree edition) ran a story (registration required) on Phillip McKinney, a blogger and VP and CTO of HP’s personal systems group. For most, his claim to fame would be convincing Hurd to spend a few hundred million buying Voodoo PC.

But the most interesting thing about McKinney is his effort to incubate new ideas through a formal process of open innovation, by creating the Innovation Program Office. McKinney seems to have a highly original take on internal incubation, one that just might make a difference in restoring the company’s once-great record of innovation.

From the Q&A (not yet online):

We actually ask that every initial idea has to be able to answer five questions. …

1. “Will this idea fundamentally change the customer’s expectation?” …
2. “Does this idea fundamentally change the competitive landscape?” …
3. “Does this idea fundamentally change the economics of the industry?” …
4. “Does HP have a contribution to make?” …
5. “Will this idea generate enough margin?”

While these are good questions, they have been studied before. I don’t know if McKinney has read Radical Innovation, the multi-year study out of RPI that focused on these questions. If not, he should.

Technorati Tags: HP, open innovation, R&D

Addicting the starving masses

One of the things I recalled from my childhood was grownups (especially my parents) talking about helping the “starving people in India” or the “starving masses of China.”

Of course, the story has changed considerably in intervening 40 years. Particularly in the past two decades, elements of both Indian and Chinese society have enjoyed rapid economic growth and (in some cases) a developed country standard of living, driven in varying degrees by exports of software and electronics, respectively. Still, with billions in rural poverty between the two countries, the mean GDP in both countries remains low ($3,700 & $7,600) relative to more developed countries (e.g. $24,200 in Korea or $30,900 for Singapore).

One of the problems for Western (particularly US) firms has been the high level of IP piracy: people are consuming the information goods (software, movies, music) of more advanced companies, but they’re not paying for them. The issues are complex (as I discussed in a 1995 article). There is also the prospect of change: Japan has dropped from 67% in 1994 to 27% in 2006.

Still (potentially biased) industry estimates place “business” software piracy rates as 82% in China and 70% in India. As with teenagers and music, the motivations boil down to two. One is they can’t pay (or don’t want to). The other is that they don’t have to, because free, copyright-defying alternatives are available.

One response has been to try to export US-based tactics, like seizing bootleg CDs and DVDs. While this may work in Silicon Valley or Los Angeles, developing country enforcement officials haven’t made it a priority. After China joined the WTO in 2001, the hope was that the TRIPS agreement would be enough to force cooperation from WTO countries. And at one point I heard (second hand) that an industry executive working in piracy in China did not feel safe living in China, but instead lived in Hong Kong and only visited China when the authorities were willing to conduct a showy seizure.

Microsoft in particular faces a difficult set of choices. As elsewhere in the world, they want people to get used to using their software, both to create switching costs/lock-in and also a supply of complements (software, books, training, etc.). On the one hand, using the software without paying gets consumers (as with Napsterized US college students) accustomed to never paying; on the other hand, saying “pay or else” could create millions or billions of Linux users.

The problem is particularly severe in China, where Linux is being promoted by Red Flag Linux (a local champion) and widely used for embedded products. In India, there are many companies servicing the global IT industry, and for these companies ignoring Windows is not an option.

Earlier this month, Microsoft introduced its latest strategy, a license for XP and Office in developing countries that goes for $3. (Of course, as Infoworld notes, Google apps are free, and Microsoft has a few conditions).

This particular initiative seems designed to pre-empt any official government endorsement for competing operating systems. One impetus is the One Laptop Per Child announcement last week that its $176 computer is due later this year — and appears to now run Windows. OCPLC is a big deal, because if millions of young kids get hooked on some alternative (like Linux), that’s millions that won’t be hooked on Microsoft product.

Back in the 19th century, other Westerners wanted to get the Chinese addicted to their exports, and the result was two wars. (I’ll admit, the parallel is a stretch). Many scholars of Chinese history would argue that in the past 150 years, the top goal of the Chinese government has been to become independent of such foreign control or influence. Microsoft’s prices are attractive, and they have the WTO on their side, but they clearly are swimming upstream.

Technorati Tags: China, Microsoft, platforms, Windows

UPS: neither cheap nor good

In my first job out of college, writing SIMSCRIPT compilers for CACI, I had to go to the management training (corporate culture indoctrination) sessions at company HQ in Rosslyn. CACI founder Herb Karr had a bunch of slogans illustrated by cartoonist, in hopes of promoting a decentralized, entrepreneurial, bottom-line oriented culture. The one I remember is the slogan "We’re not cheap, we’re good,” with the customer using a monocle to look at an eye-popping diamond.

This mantra (which I later learned is called “premium pricing based on quality differentiation”) stuck with me when I started my own business. It worked for us for more than a decade, until a) our customers faced price pressures and started pinching pennies; and b) technological change lowered entry barriers, commoditizing our market segment.

At CACI and when self-employed, I used Federal Express. Meanwhile, my mentor Charlie Jackson swore by United Parcel Service. He always said that UPS was the one company he couldn’t do without (to deliver his software products) — suppliers, distributors, dealers, FedEx were all expendable, but UPS was indispensable.

Today I swore at UPS, because their bureaucratic inflexibility in the name of efficiency belies the claim they are delivered a “service.”

For more than 50 years, UPS has been famous for epitomizing Taylorism (i.e. the principles of F.W. Taylor’s 1911 treatise The Principles of Scientific Management). Every year or two, we’d see our driver accompanied by a researcher (supervisor) equipped with a clipboard, doing time-and-motion studies in hopes of improving productivity. The trend has only continued with the advent of modern technology.

Anyone who’s dealt with their residential service knows that their #1 priority is making the delivery — to the point of leaving a $100 item behind a hedge in the rain if that saves them from coming back.

Today’s hassle — trying to gain custody of my latest Amazon purchase — went far beyond the telephone-tree-hell that we’ve all become accustomed to. The left a tag Friday, but I knew that no one would be around during some of the 3 hour window specified for Monday, so I was trying to schedule a time when someone would be home.

Whether talking to the computer (their preference) or a human being (in a futile hope of gaining more flexibility), I could pick a dropoff date but not one of the three-hour time ranges on the tag. They said I could have a neighbor sign for my parcel (my neighbors work) or redirect to my work (which, being a government bureaucracy, proclaims that “We do not accept personal parcels and are not responsible for damage or loss of such items.”) This means that for accepting delivery of everyday (signature required) items, UPS is less convenient than either the cable guy or the phone company. Hardly a standard of service to which one aspires.

Meanwhile, UPS has been pushing up prices to milk more yield out of customers (even before fuel prices went up); for anything over a few pounds, FedEx Ground (née Roadway) has been much much more affordable. Meanwhile, the stock is trading within 5% of where it closed on its IPO date back in 1999.

Lousy service, higher prices, poor shareholder returns. What’s not to hate?

Technorati Tags: United Parcel Service

VoIP? What VoIP?

Nokia has been promoting the built-in WiFi and VoIP capabilities of its new N95 smartphone. This literally is its top of the line, with Symbian OS 9.2, all the alphabet soup of connectivity, a 5 megapixel Carl Zeiss camera, and an (unlocked) street price of $850-950 in the U.S.

Of course (like nearly all of Nokia’s smartphones) you can’t buy it from any U.S. carrier, but that’s a familiar story. However, it’s being aggressively promoted by a number of European carriers and retailers.

There’s one little problem, as Dean Bubley of Seeking Alpha reports:

it appears that some operator-specific variants [Orange and Vodafone Group (VOD)] have been named and shamed) have the native VoIP capability crippled, and also apparently don't work with downloaded third-party VoIP apps like Truphone’s.

Now of course all the carriers (such as T-Mobile) want to block or prevent network bypass, and manufacturers (even Apple) are willing to comply.

Still, this raises two obvious questions:

1. Do the carriers think they can prevent this forever?
2. If the carriers are successful, what’s the point for Nokia to continue to develop these features? And without such features, how does it sell high-price, high-margin phones?

AT&T tried to prevent MCI from getting access to its network, but the FCC slapped it down and mandated competition. Given the prospect of a similar ruling for mobile phones, perhaps that’s why operators aren’t bringing these phones to the U.S.

Of course, most of the world’s major mobile phone operators (Verizon, Cingular, Orange) are owned by the former wireline monopolists, filled with executives trying to recreate the monopoly they believe to be their birthright. (I would count DoCoMo in this camp, even though they are legally independent from NTT).

As a consumer and a researcher, I often long for the days of McCaw and AirTouch, when companies promoted change rather than fought it. Of course, McCaw sold out to AT&T (now the largest US carrier) and AirTouch to Vodafone (the world’s largest). Although Vodafone was founded in 1984 as the UK’s first competitive carrier, my British friends tell me it asserts raw market power as nakedly as any former monopolist.

Technorati Tags: business models, Nokia, VoIP

iPhone more important than upgrades

I guess being busy last week with my day job, I missed the big Apple announcement — the one that they gave everyone but didn’t put on their website. Apple is pulling all development resources from OS X 10.5 (“Leopard”) to push the iPhone out the door, delaying 10.5 from June to October.

Tom Yager of InfoWorld.com has the best argument in support of the decision, which presumes that existing users don’t care all that much about getting a 64-bit operating system with minor feature enhancements. On the other hand, delaying Leopard either means delaying new Macs (such as the rumored MacBook Pro, iMac or new subnotebook) or means doing incremental update releases of 10.4.x to support the new model(s). As an Apple ISV, I remember how Apple used to do this all the time in the early 1990s, obviously wasting a lot of R&D, QA and support resources to handle these incremental releases rather than matching the new product intro to the existing OS schedule.

Before the Leopard slip date announcement, Citigroup was very bullish on iPhone sales while now American Technology is quite bearish. They can’t both be right, so it will be interesting to see who ends up with egg on his face. (Interestingly, the same American Technology analyst who’s bearish on the iPhone also is predicting the subnotebook, so he could either hit two home runs or two strikeouts).

One thing I didn’t see remarked is what this says about OS X on the iPhone. Yes everyone says the iPhone runs a “slimmed-down version of OS X” — hopefully WWDC in June will reveal what this means. But, given the mythical man-month, the idea that engineer-hours are fungible enough between OS X and the iPhone to do some good suggests that the development environment, kernel and many of the UI and app layers are pretty similar.

As long as this is my first iPhone posting in more than a month, I might as well mention that I’m now an official academic “expert” on the iPhone. One paper (co-authored with Mike Mace) has been accepted at the DRUID Summer Conference in June, and I’ll also be doing a dry run a couple of universities before then. One of us will also be presenting a second paper at the LA Global Mobility Roundtable.

Technorati Tags: Apple, iPhone, OS X

Low barriers = high competition = looming shakeout

I read an article today online that I just can’t close, I don’t know why. David Wolf writes on Seeking Alpha about how the PRC’s state planning agency has approved four consumer electronics firms to start making mobile handsets, added to approximately 80 firms already in the Chinese market.

Wolf detects signs of capitalism among the central planners:

I see something very positive in the NDRC's move. The senior economists and policy makers at the NDRC are not stupid - they know that China's mobile handset market - no matter how big it is - cannot hope to support nearly a hundred companies in the business. Frankly, I doubt the entire world, with a billion handsets made each year, could support a hundred handset makers.

The message that the NDRC is sending in this move is that rather than select champions to support and force the rest out of business, they are letting the market decide who will survive. Will this mean cannibalistic hypercompetition among manufacturers? Absolutely. But the thinking is that the companies that DO survive will be better suited to compete both locally and globally than they would if the winners were selected by the bureaucrats.

Wolf predicts the survivors will be Nokia and Motorola from the West, Sony-Ericsson and Sanyo (Sanyo?) from Japan, LG and Samsung from Korea and two Chinese firms, Ningbo Bird and ZTE. A few ODMs might survive (probably not including BenQ, which made a failed effort to become a branded firm with its Siemens acquisition.

Wolf goes on to make an even stronger prediction:

Here is the ultimate result, and I'd wager this is what the NDRC is betting on: China will be the global center of the mobile handset industry, not just in manufacture and consumption, but in research, design and development as well.

I don’t know if I completely agree, but this is a provocative article rather than just more of the same.

Technorati Tags: China, mobile phones

Two cents or a dozen spam?

In the aftermath of the Virginia Tech tragedy, some of the recriminations over the school’s emergency response have centered on its slowness to notify students of the 7:15 a.m dormitory shootings, 150 minutes before the main rampage began. Two hours after the initial shootings, the university began to send e-mails and telephone calls to all students.

While a technical fix would not have started the notification sooner, it could have spread the message more widely to those not in their dorm room or on the Internet. (How many classes don’t have students on the Internet? I can’t think of any). The use of mobile phone text messages is an obvious way to fill this notification gap.

After highlighting a best-case scenario of UT Austin using text messaging earlier this year, three reporters in the Wall Street Journal this morning summarized the available emergency notification options available to schools, government and companies (registration required). The astounding paragraph was the following:

Mobile Campus — which provides text-message services to more than a dozen customers, including the University of Texas — offers its services free of charge on the condition that the universities allow the company to send two promotional text messages per day to students who subscribe to their services. E2Campus, another text-messaging company that has more than 30 customers, charges $1 a year per student for universities to use their communications services. Both companies say that they received an overwhelming number of inquiries after the Virginia Tech shootings.

Spam — in e-mail, telephone calls and cell phones — is rampant, affecting billions of people, the “broken window” of our electronic society. But if it were a choice of saving lives vs. annoying messages, it would be hard for anti-spam activists to argue that a university should avoid services such as Mobile Campus, which has already been adopted at UT Austin (amid controversy), Florida and Penn.

But ask a hundred students on campus — or put it to a formal vote: are you willing to pay a dollar to avoid up to 730 spam messages each year? That’s less than 2¢ for every dozen messages. What’s really scary is that with an advertising-supported system — and the attendant opt-out option — less people would get the essential messages when they are needed.

E2Campus (a reseller of an integrated notification system made by Omnilert LLC) seems to have a more viable revenue model. If Mobile Campus sticks to its existing revenue model, it seems like it will be left behind by the imminent explosion of demand for such services.

Technorati Tags: business models, mobile phones, spam

Ga-ga over Goople

This morning’s Forbes.com brings a column by Rachel Rosmarin fantasizing over “Goople” — the possible benefits of greater cooperation or even a merger between Google and Apple.

The column notes the directorship overlaps between Apple and Google (through Eric Schmidt and Arthur Levinson) while conceding that having Larry Ellison sit on Apple’s board didn’t exactly produce a slew of Apple-Oracle partnerships.

Still, it seems as though the purpose of the column is to introduce a series of fanciful combinations (with clever sketches by Dave Klug) suggested by Rosmarin and various industry analysts.

Overall, I didn’t think much of the suggestions. Yes, Google likes partnerships, and Apple partnering with Google for search is less problematic than partnering with Microsoft. That Apple has stronger ties to Google than Yahoo might tip that decision away from Yahoo, but it’s not like the differences are dramatic.

Perhaps a little more interesting is that (class, take notes) that if I asked students to study the proposed combinations, there is a pretty clear picture of their (perceived) relative competencies: Google has technology, Apple has hardware and distribution, while both have a rapacious desire for diversification.

Although it’s always easier to say “no” than “yes,” most of these didn’t make sense to me. Perhaps only one resulted in incremental revenue for Apple, so why should it bother? It’s not like Google would bestow cachet upon Apple, in the way that a Google-Gateway or Google-Samsung deal would for weaker partners.

Meanwhile, Google’s entire strategy has (thus far) been predicated on being an honest broker, an neutral supplier to all the various systems vendors and infrastructure operators. Vertical integration or efforts to steer customers to Apple would push the Windows vendors into the arms of Live.com. It might make sense if Mac + Linux were 40% of the search market, but at < 5% it’s foolish. Eric Schmidt spent more than a decade spitting into the wind, first at Sun and then at Novell, so (mixed metaphor alert) he knows better than to throw away any of trump cards in Google’s hand.

Graphic credit: Dave Klug, as published by Forbes.com

Technorati Tags: Apple, Google

IP this ’n that

This morning’s newspaper had a lot of IPR business news. While I realize by now most of it is 24 hours old, still the juxtaposition was very interesting:

• The Qualcomm-Nokia patent license witching hour came Tuesday and went without any news. I analyze the fight on the Qualcomm blog.

• Apple’s iPod brand, market position and business model have yet another challenger.
  • This time it’s a new $250 model of Sansa player (from the #2 MP3 player maker Sandisk holding a 9% share) that connects wirelessly to the Yahoo music service. The Yahoo service is interesting because it’s a monthly (unlimited) rental revenue model rather than the buy-to-own of the better established iTunes Store.
    
  
  • Also interesting (unmentioned in all the breathless coverage of the next “iPod killer”) is that Sandisk is offering a similar product partnering with Rhapsody, Yahoo’s most direct competitor for unlimited downloads.
  • Meanwhile, Apple Monday announced that is has sold 100 million iPods since November 2001: good for an MP3 player, but Nokia sells 3x that many cell phones every year (increasingly with embedded MP3 players).
• Google’s China IPR problem. Google admitted it used the Pinyin front-end processor (FEP) character entry technology belonging to rival Sohu, and Sohu is ready to sue. Finally Google has an IPR problem not related to GooTube.
• US complaining about Chinese “piracy,” now in a formal complaint to the WTO. Predictably, the US Trade Representative is wringing her hands while the Chinese threatened (implicitly) US access to Chinese markets if the US seeks to enforce its IPR rights.

Somehow I find the last one the most amusing. I wonder if it’s in the USTR job description to issue press releases about trade deficits being caused by “unfair trade,” specifically our Asian trading partners not following Anglo-American law. Other than Hong Kong before 1997 or (maybe) Singapore, did any of them ever promise to follow Anglo-American law?

I liked it better when USTR Charlene Barshefsky was kvetching about Japan, on the assumption that at least she recognized Grand Kabuki when she saw it.

Technorati Tags: business models, China, Google, intellectual property, iPod

End of a business model and an era

I did want to remark on an important milestone this month: the death of InfoWorld (dead tree edition). After nearly 30 years, the April 2 edition of the printed trade journal was its last.

During my career in the PC industry (1987-2002), the weekly InfoWorld newspaper was the industry bible. You went to Byte for an accurate picture of the technology, and InfoWorld for the breaking news. If it was a big enough story, you’d read the watered-down version in the Wall Street Journal and then wait for the full story (or more likely stories) in InfoWorld.

It was there almost from the beginning of the PC industry, founded in 1978 by Jim Warren (as Intelligent Machines Journal) — one year after Warren had produced the legendary West Coast Computer Faire where the Apple II made its debut. The next year it was absorbed into Pat McGovern’s then-nascent IDG empire, and given its current name in 1980.

The magazine attracted some of the best and the brightest in the industry, including some not normally found in trade journals. Bob Metcalfe (of Ethernet and 3Com fame) was publisher from 1991-1993 and columnist from 1992-2000. Stewart Alsop (who brought us the Whole Earth Catalog and the WELL — one of the first Internet-connected BBSes) was editor-in-chief from 1983-1984 and 1991-1996. I remember as a small business owner, I had to, er, get creative in filling out the subscription card so I could make sure that I (on the 2nd or 3rd try) would get my free weekly copy.

When I left journalism and went back to computers, I wondered whether I should have tried trade journalism (which then had 2nd tier status among journalism graduates). I got my chance 5 years later, when in 1988 I became a columnist for MacWEEK which, like its sister PC Week, was an InfoWorld knock-off published by Ziff-Davis.

I suppose what is amazing is that it lasted so long. The monthly Byte gave up the ghost in May 1998. The weeklies didn’t fare much better. With the expected death of the Mac, MacWEEK morphed into eWeek in 1999 (ironically exactly a year after Steve Jobs took over as iCEO). The paper PC Week died in May 2000, when it was folded into eWeek (which somehow remains in print).

The proximate cause of InfoWorld’s death is CNET, the best online IT industry news source for nearly a decade; it was aided by thousands of bloggers and discussion boards, and advertiser preferences. InfoWorld.com will continue to do battle with CNET, aided by a worldwide stable of IDG news service reporters (while CNET shares content with its former rival ZDNet).

There are still cases where print is more convenient (outside, on an airplane), but none where it is quicker or cheaper. This is happening first in the IT trade journals, but it’s certainly not a good omen for Sam Zell’s new $8 billion hobby. For most purposes, the days are numbered for dead tree business models in publishing.

Technorati Tags: business models, PC

Some document standards more open than others

Most readers of this blog have already read about the ongoing fight about the Open Document Format, which is being led by two engineers who work on XML document formats at Sun’s OpenOffice.org group. The standard is being promulgated by OASIS, an industry consortium led by IBM and Sun, but many of the key technical issues have been discussed in open forums for more than four years.

Of course, this is aimed directly at the ubiquitous (and proprietary) .DOC (aka Microsoft Word) format that hold the overwhelming majority of the world’s formatted documents. The most visible aspect of the conflict was the attempt to get the Commonwealth of Massachusetts to adopt ODF by Peter Quinn, its CIO until the controversy forced him out (and then his successor) out last year.

The various conflicts around Microsoft have been well covered by ODF supporters in special sections on Groklaw, Andy Updegrove’s blog, and the blog of IBM’s Bob Sutor. The bible of enterprise IT, Computerworld, has also given it frequent coverage.

The story surfaced on Easter Sunday in (of all places) the International Herald Tribune, the pre-Internet bible of American expats in Europe (and now a wholly-owned subsidiary of the Gray Lady herself). The story noted that while the ODF became an ISO standard nearly a year ago, Microsoft has proposed its own XML schema for ISO standardization, called Office Open XML. The OOXML is already standardized by ECMA, a Microsoft-friendly ISO-partner trade association that previously blessed Microsoft’s C# language.

Clearly the competition from ODF (as with other competition) is forcing Microsoft to be more responsive to the needs of customers and complementors, after more than a decade of a completely secret proprietary file format. Microsoft acknowledged the importance of file interoperability in its announcement last year of OOXML for Office 2007.

The criticisms of Microsoft’s ISO application seem to be twofold. First, if the world already has an ISO standard for office documents based on XML, why does it need a second? I suppose Microsoft’s argument is that ODF is controlled by its major competitors and they are designed to make its life difficult. Of course, Microsoft could have joined the ODF technical committee, but (like IBM in its day) would prefer to continue to control its own proprietary standard rather than accelerate adoption of a (low-switching cost) open standard.

Technorati Tags: ISO, Microsoft, ODF, OOXML, open standards, XML

Eclipse as the happy medium

For the past three years I’ve been studying open source communities with Siobhán O’Mahony. We produced one paper derived from our interest in a particular open source problem (code without community), and will be presenting our latest paper next month at the European Association of Management conference in Paris.

As part of that research, I was struck by how unusual the Eclipse Foundation is. Apache is also governed by a foundation, but corporations are deliberately de-emphasized in favor of individuals. The OSDL and FSG (er, Linux Foundation) have the same industry consortium model, but (unlike Apache or Eclipse) it’s hard to argue that the LF controls Linux.

In response to the same Matt Asay column I mentioned yesterday, Mike Milinkovich, the executive director of the Eclipse Foundation also blogged about the ongoing GPLv3 saga. Milinkovich must have been channeling me (only kidding) when he wrote:

If we replace the monotony of proprietary software with the monotony of a single free software license, we are all losers. Diversity of licenses allows diversity of business models and diversity of competition. Which is a very good thing for the entire community and industry.

On the other hand, Milinkovich seems to waste a lot of bits (if not dead trees) genuflecting at the Free Software Foundation altar:

1. Free software != GPL. Free software is a principle, and the GPL is one expression of that principle. …
2. GPL != copyleft. There are quite a few other copyleft licenses (both "strong" and "weak"), the EPL being one. Not everyone agrees with the specific copyleft approach of the GPL. …
3. L != monetization. There are a great many successful companies built on top of the GPL. But in addition there are also some very successful business built on top of other licenses such as the EPL, Apache and MPL. …

I don’t quite get why approval from the FSF or other GPLniks is so important to Milinkovich or the foundation. The whole reason the term “open source” was invented was to legitimate collaboration between industry and community without having to adhere to the FSF dogma. The Eclipse Public License is an OSI-approved license, and in fact made the cut when the OSI leaders decided to deprecate the vast majority of licenses. As a “weak copyleft” license, the EPL (like the MPL and CPL) is an intermediate point between the completely open (and free) rights granted by the BSD and Apache licenses, and the compulsory sharing of the GPL.

Milinkovich certainly knows what he’s talking about. He worked as a manager for Object Technology International, the Smallltalk shop that IBM bought in 1996 that became the IBM Ottawa Software Lab. As an IBM division, OTI developed the Java IDE that IBM released as Eclipse in 2001. Milinkovich has run the Eclipse Foundation for the past three years.

Milinkovich did hold his head high with his final comments:

So while the GPL community can be quite rightly pleased with itself on completing GPLv3, I hope that they keep the dialogue with other communities positive and respectful. The open source community is a big place, and there is room for many different viewpoints, licenses and business models.

Personally, I’d go further by saying GPL and its adherents are a small part of the overall open source economy that has developed over the past decade — one that would be rather unimportant if Linus Torvalds somehow abandoned the GPL. However, it’s clear that the major players in the industry have to make nice with the FSF because (if for no other reason) its list of approved licenses has a huge impact on their business strategies.

Overall, Milinkovich has a surprisingly capitalist bent for a Canadian (kidding again). But then he’s managing an annual budget of (my estimate) nearly $5 million paid by more than 100 member companies. These firms are not supporting the foundation for the betterment of society, but to further their own specific (profit-making) business models.

Technorati Tags: business models, Eclipse, GPL, open source licenses

Too much stuff in the box

Twenty years ago, one of the functions of my local Mac user group was to sell floppy disks of shareware software. Some of the packages were truly shareware (honor payment), while others were reduced-functionality versions of commercial products. These got the nickname “teaseware,” “demoware,” or “crippleware.”

Many years later, a friend with a peripherals company said the internal name for the demo software that they distributed with their hardware was “stuff in the box” (except he didn’t say “stuff”). Lots of small software companies relied on such bundled demos as their primary way of getting their products in front of consumers, and my own company depended for several years on bundled fliers (but not teaseware) to promote our plotter driver.

This morning America’s most influential computer columnist, the Wall Street Journal’s Walt Mossberg, lashed out at the plethora of crippleware packages loaded on his new Sony laptop:

I’m distinguishing these programs, sometimes called “craplets,” from the full-featured, built-in Sony software meant to enhance the computer, or from entire, useful programs Microsoft builds into Windows, such as music and photo organizers.

On my new Sony, there were two dozen trial programs and free offers. The desktop alone contained four icons representing come-ons for various America Online services, and two for Microsoft. The start menu and program menu had more items that I neither chose nor wanted. Napster, a music service I don't use, was lodged at the lower right of the screen.

Is bundling AOL software on the hard disk worse than a bimonthly mailing of a floppy (or CD-ROM) to every man, woman and child in the US? Certainly the bundling is better for the environment, even though it might be more expensive.

Still, Mossberg is outraged (or at least feigns it) over the principle of the thing:

The problem is a lack of respect for the consumer. The manufacturers don't act as if the computer belongs to you. They act as if it is a billboard for restricted trial versions of software and ads for Web sites and services that they can sell to third-party companies who want you to buy these products.

This is a reminder of the limits of such business models (both for distributors and the participating vendors). MBAs at Sony or Dell may have calculated the incremental benefit of each co-marketing deal, but not the cumulative effect on how consumers view their new computer.

It doesn’t have to be that way. Apple under Steve Jobs (in both the Jobs I and Jobs II eras) has relentlessly focused on the total user experience. Google thus far has been able to pull it off. Silicon Valley companies are populated with Apple refugees and admirers have long shown that this is not specific to one company. Don Norman has created an entire company around preaching this message.

So this isn’t rocket science. It just requires listening to the people who understand what’s going, and reining in the greediness for “found money.”

Technorati Tags: business models crippleware

IBM and Joel vs. FSF and Matt

The latest update on the GPLv3 saga is that it has (apparently) been dissed by IBM’s top software honcho, Steve Mills. A lifetime IBM employee, Mills was the subject of a front page article (subscription required) in Monday’s Wall Street Journal:

Increasingly, the public face of International Business Machines Corp. is that of Steve Mills.

Mr. Mills heads IBM's rich and acquisition-hungry software unit, which has buoyed results in recent quarters. He frequently represents the company at investor conferences and software-customer gatherings, and his rising profile reflects a new reality at the technology giant.

IBM still gets most of its reputation from its computers and most of its revenue from services, but most of its profit growth comes from software. … On a stand-alone basis, IBM would have had the second-highest revenue of any software company after Microsoft Corp. Software revenue grew 14.4% in the fourth quarter and reached $18.2 billion last year. Software accounts for only 20% of total revenue -- but 40% of earnings. Fast-growing IBM brands include WebSphere, a variety of Internet tools for business, which gained 23% last year; Tivoli, which manages computer systems, up 26%; and Lotus, which makes email software, up 12%.

Last week, the trade journal CRN tried to drag Mills into the ongoing GPLv3 controversy.

"At some point you become so shrill and beyond what's required that you lose the audience and the audience moves on to something else," he said.

"We'll have to see what finally evolves through the [GPL] process, it's going through an update and the Free Software Foundation has a particular view of free software. Free software is a wonderful thing but there's also a business model."

"We think there are other licensing techniques, the Apache license and others are somewhat less onerous. We use them ourselves. We don't use the GPL for reasons of its restrictions," Mills said.

On Tuesday, my friend Matt Asay (co-founder of OSBC and former Novell OSS strategist) slammed Mills:

But IBM's fetish for all things Apache has kept it from seeing open source as a tool that it can monetize directly…

It's not clear what audience Mills is worried about the FSF/GPL losing. After all, the GPL governs over 72% of the projects on Sourceforge. He may well wish that Linux, Alfresco, Jasper Reports, Xen, etc. etc. were Apache-licensed so that he could drop them into his proprietary products and keep to his 20th Century business model. But just because it's comfortable for him doesn't mean that the open source world should capitulate to his whims.

So IBM hasn't figured out what the rest of us know with ever-increasing certitude: it's possible to monetize open source directly. Ironically, it becomes easier the more freedom that imbues the software. Even more ironically, this is so because companies like IBM don't want to touch software that is free - it threatens their proprietary software.

I think highly of IBM, but find its antipathy to the GPL to be silly.

I think highly of IBM too, because its early support for open source made it legitimate for IT buyers around the world. Unlike the one-trick ponies of open source startups (that depend on such things like dual licensing), IBM has the broadest range of open source participation and greatest diversity of open source business models of any company in the world. It creates open source and gives it away (like Jikes), it takes its software to create a new community (Eclipse), it installs and supports (the GPL-licensed) Linux and pays to support the Linux Foundation (née OSDL), and they were the first major corporation to back the Apache Foundation. The list goes on: there is no “IBM” strategy for open source, because no company with 330,000 employees can think with one mind or speak with one voice.

As for Matt’s criticisms, the easiest to knock down is license popularity on SourceForge. The vast majority of software projects on SourceForge are vanity projects, irrelevant to business, consumers or the economy. Comparing SourceForge license choices to those of real software is like comparing the IT choices of bloggers to those of major news organizations.

It’s also silly (as Matt knows) to suggest that IBM has an Apache fetish. IBM, after all, brought us the IBM Public License (which became the Common Public License which became the Eclipse Public License), one of the first licenses derived from the seminal Mozilla Public License. Using the CPL/EPL, IBM created the Eclipse project — the first open source project to really integrate vendor sponsors, a non-profit foundation and the community from day one.

Instead, I think Matt has a GPL fetish. In its most narrow (some would say precise) construction, the term “open source” means any license approved by the OSI that conforms to its Open Source Definition. The Free Software Foundation notwithstanding, there is nothing in the OSD (or the OSI policies) that say that the GPL is any better than the MPL, EPL or even the Apache or BSD licenses.

I think highly of Matt Asay, but his love affair with the GPL is silly.

Graphic credit: Chris Onsted’s Achewood cartoon, via Joey deVilla’s blog

Technorati Tags: compulsory sharing, GPL, open source licenses, IBM

V is for very little

In light of its patent problems with Verizon, Vonage will be late filing its 2006 annual report. Certainly the damages potentially due to Verizon are material to its statements.

What will it do about its patent problems? Ars Technica (and later CNET and other outlets) carried this breathless story:

Vonage has signed an agreement with a VoIP network services provider to carry calls placed by Vonage customers, giving the troubled VoIP provider an out on two of the three Verizon patents it was found to have infringed. According to a Form 8-K filing with the Securities and Exchange Commission, Vonage and VoIP, Inc. have inked a two-year contract under which VoIP, Inc.—likely under its VOICEONE brand—will provide network services for Vonage customers.

While there is a deal with VOIP Inc., Vonage denies that patents are the motivation:

After the story ran, Ars was contacted by a Vonage spokesperson that claimed that the agreement with VoIP, Inc. has "nothing to do with the patent situation." She described the deal as another termination deal similar to those Vonage has signed with other carriers, reiterating that the agreement was unrelated to the Verizon agreement. However, an unnamed source at VoIP, Inc. suggested to TelecomWeb that Vonage would indeed be using its network to carry its calls, while refusing to speculate about the patent dustup.

Here is the SEC filing by VOIP Inc.:

Effective March 28, 2007, the Company’s wholly owned subsidiary Voice One, Inc. entered into an agreement with Vonage Network Inc. (the “Vonage Agreement”) whereby Voice One will provide certain network services to Vonage for their domestic customer base. The Vonage Agreement is for a term of two (2) years and is month to month thereafter. Under the Vonage Agreement, the Company will receive revenues based upon the amount network services provided.

So is Vonage denying they have a patent problem? Denying they have a patent solution? Denying this is their patent solution?

With only minor digging, it’s pretty clear here that a small company (VOIP Inc.) is trying to get publicity off of the Vonage name and its highly visible problems. The 8-K wasn’t filed by Vonage (either with the SEC or its IR website) because the deal with VOIP is not material to its business. Instead, VOIP Inc. has a habit of filing 8-Ks to give the impression of impeding good news. The VOIP Inc. 2006 10-K shows that they are badly losing money — revenues of $14.7 million, cost of sales of $14.7 million, and operating expenses of $31 million.

Vonage’s last quarterly statement indicates that they are also losing lots of money, but are a $500+ million/year company — nearly 40x as big as VOIP Inc. Or at least they were, until they started losing customers over the patent uncertainty. Perhaps now they’re only 30x as big.

Technorati Tags: patent infringement, VoIP, Vonage

Good meddling and bad meddling

Apple hoped that by providing downloads without DRM it would solve its problems with EU regulators over its FairPlay DRM system. This remains to be seen. Meanwhile, it has other problems.

Today the European Commission announced that its competition authorities were investigating the iTunes store over pricing. The well-written AP version makes it clear, however that the issue is less the price that Apple charges in different stores (mainly Euro vs. non-Euro, i.e. UK), and more that it won’t let customers buy music from countries other than their country of residence. Such intra-European price shopping was supposed to be one of the benefits when the Euro currency was introduced in 2002.

The root of the problem is that the record companies grant rights on a country-by-country basis. Is this Apple’s fault? Of course not, it existed decades before the first iPod. Is it the record company’s fault? Not necessarily — the record companies may have their distribution rights (whether for the composition or the performance) on a country-by-country basis.

Normally I’d say that government fishing expeditions are a great example of government subtracting value and attempting to micromanage the economy. This could be true here, too. However, it may also be that by getting all the agreements out in the open, everyone — politicians, bureaucrats, the industry, consumers — can see what the impediment here is to a pan-European licensing system. One possibility is differences still exist in contractual (or copyright) law between member states. Another could be that those differences disappeared in the last few years, but the country-by-country music industry practices have not been updated to reflect that change.

In the long run, this is probably a good thing for consumers and Apple. It might even be a good thing for the record industry — by providing the sort of efficiencies that are necessary for globalization — even it has to get dragged kicking and screaming into the 21st century.

Technorati Tags: antitrust, Apple, music industry, copyright

The Long and Winding Road … to Satisfaction

Apple’s announcement this morning for its iTunes music store is another earthquake for the music industry. While it resolves some issues, it leaves major ones unresolved.

In a press conference in London, Apple CEO Steve Jobs announced that one of the big four record labels, EMI, in May will make its catalog available for download without DRM. Consistent with Jobs’ call to abolish copy proection, this could help solve Apple’s regulatory hassles over its closed DRM system, or at least buy it some time. However, there were several major caveats:

• It costs more: the price per track goes up 30% in the US ($1.29 vs. $0.99) and 25% in the UK (99p vs. 79p); no Euro price is yet posted. For that you get no DRM and a higher quality (256 kbps vs. 128 kbps) track. Purportedly the prices for downloading entire albums remain unchanged, consistent with its new Complete My Album program.
• The songs are not in MP3 format, but (like other iTunes downloads) in AAC format — supported by the iPod, Zune, but not all MP3 players.
• EMI is the smallest of the big four, with roughly 10-15% of the industry. This is not their first experiment with DRM-free music, but it’s obviously the biggest.
• The downloads include all currently downloadable EMI artists — such as the Rolling Stones (on Virgin), Elton John (on Chrysalis) and Norah Jones (Blue Note) — but not the Beatles. Despite Apple Inc.’s earlier trademark settlement with the Apple Corps, Sir Paul and the rest of Fab Four are still holding out for a better offer.

The economics of the deal are interesting. Obviously there is no cost difference for encoding without DRM, and the incremental cost of inventory (or bandwidth) for the 256kbps songs is minimal. This means EMI will let Apple sell DRM-free music as long as it gets more money — gaining the price increase that the big four were hoping to achieve.

Today’s announcement shows yet again that Apple holds the keystone advantage in the digital download ecosystem. Apple has about an 80% share of US legal downloads, but the deal is worldwide. Apple wins in three ways:

• Everyone’s iPod now holds half as many downloads, necessitating an upgrade for those who use their iPod mainly for downloads.
• It gets to sell upgrades to more than two billion songs sold thus far, perhaps overcoming the speculated slowdown in downloads (or, more accurately, levelling off of growth).
• The DRM-free music may get iPod owners to buy more than 15 songs/year.

Also, Apple’s efforts could shift some industry attention from MP3 to AAC. While AAC is widely believed to have better sound quality, the real difference is the business model. Since both are heavily encumbered by patents, I’d consider neither to be a truly open standard. However, the AAC royalties are based on encoders and decoders with an annual cap of $250,000, whereas the MP3 royalties include both an upfront encoder and decoder charge, as well as 2-3% of the content price. Better still for Apple, as part of the MPEG-4 patent pool, it gets either an offset (or, if it’s lucky, a royalty-free cross-license) of the AAC fees for use of its own patents.

To check some details in writing this post, I went back to the MBA teaching case I wrote on digital downloads back in Fall 2002. The Big Six (Warner, Sony, Polygram, EMI, BMG, Universal) had become the Big Five in 1998 (with the Universal-Polygram merger) but not yet the Big Four (when Sony-BMG seemingly combined in 2004). CD sales had fallen for one year, but the trend was not yet established. At that point, Apple had released its iTunes music software (January 2001) and the iPod (October 2001), but the iTunes Music Store (now just the iTunes Store) was in the future (March 2003). Meanwhile of the download services announced by mid-2002, today only one (Rhapsody, now part of Real) is still viable.

In less than five years, Apple has transformed the industry, and despite efforts by the record labels to reduce Apple’s power and raise prices, they keep agreeing to Apple’s terms. Of course, the absence of DRM (for those who pay extra) means that iPod libraries can be migrated to Zune or Sansa MP3 players, a Walkman Phone, or any other portable music player. Apple seems willing to take the risk in exchange for a strategy of creating its own future.

Technorati Tags: Apple, DRM, MP3, music industry, open standards