Accountability is everything

Free markets only work when there are incentives and feedback mechanisms to encourage people to do the right thing. While America isn’t the freest economy in the world, it’s in the 95th percentile, which (with its commitment to democracy and free speech) has been the key to its economic success.

There were two tidbits this morning in the WSJ, one encouraging, one not.

The encouraging one was the decision of the Olin Foundation to go out of business. The creation of permanent, self-perpetuation nonprofit foundations is among the most foolish vanities of their (vain and often foolish) millionaire donors, for exactly the reason that Peter Flanigan has said:

Perpetual foundations are quite silly. They exist for the benefit of trustees and staff rather than for the goals set forth by the original donor.

Fortunately, donor John Olin created a foundation that did go out of business, a model other donors (Bill Gates?) should emulate.

The less encouraging note was a series of letters responding to a column by Ethan Penner earlier this month that identified the huge moral hazard created by the Federal Reserve’s “too big to fail” policy. Letter writer Thomas Shively was even more emphatic:

Those who fault the Fed … primarily focus on the exceptionally loose monetary policy …. [This was] only one example of the so-called Greenspan 'put,' now the Bernanke put -- the embodiment of the Fed's long-standing policy of always running to the rescue, while letting the good times roll, which has fostered the culture of moral hazard.

There is tremendous irony, and common sense, in the realization that multiple successful rescues of the financial system by the Fed over several decades will eventually create a risk-taking culture that even the Fed will no longer be able to single-handedly save, at least not without serious inflationary consequences or help from foreigners to avoid a dollar collapse.

Giving away a “put” to investors, large and small, assures that put will be exercised and that Uncle Sam spends ever-more money bailing out less prudent or more reckless members of society. It’s almost enough to make one wish Ron Paul had achieved electoral success, since on this one issue he’s 100% right.

Ironically, I found this on the day that the WSJ reported that its new owner no longer is content to have the country’s most important business publication. Instead, Rupert Murdoch will be de-emphasizing business coverage (and longer stories in general) to offer a center-right competitor to the center-left NY Times. I don’t know if this means we’ll have less intelligent coverage of economic issues in the WSJ, or just less coverage, but it’s a big opportunity for Business Week, Fortune and Forbes (and perhaps the FT as well).

Rambus wins -- who loses?

The Court of Appeals overturned the Federal Trade Commission antitrust sanctions against Rambus, which in turn overturned an earlier FTC administrative law judge who ruled in favor of Rambus. The whole issue was whether Rambus was honest about its patents in a timely fashion while JEDEC was making a RDRAM standard.

The case of Rambus and its IP strategies are among the most controversial issue in IP and standards. I would say “among” only because as with certain other topics, only one side of the story tends to get reported and many would just as soon see the company lynched. Rambus did win one trial alleging patent infringement by big vendors, who never really wanted to pay royalties.

Even for those (few) who sympathize with Rambus, the ruling has the unfortunate effect of introducing turmoil into many aspects of IP and standardization. The Rambus decision was previously a bright line that SDO managers (and participants) could count on. Now, we need to see whether Rambus’ escape is merely a process issue (JEDEC left a loophole that meant Rambus couldn’t be punished) or if it sets a more general precedent — theoretical or practical — that makes it impossible for SDOs to prevent gaming of the system.

Perhaps the 1995 case that Dell settled would be the precedent for now. My sense is that absent FTC v. Rambus we will need a new legal decision (or administrative act upheld by a court) to set the boundaries of gaming the system. There have been very few cases on this issue that have gone to trial in the past 15 years, so it might be another 5 years before we get a controlling precedent. That uncertainty would be good for law firm billable hours but bad for everyone else.

Stop your whining

For those who live outside California, the state right now is trying (or failing) to cope with its decennial budget disaster. This time around, the state is looking at a $14.5 billion shortfall in projected revenues. The governor is proposing a 10% across the board cut, including $4.4 billion from funding for local K-12 schools and $1.1 billion from higher education.

This man-made budget disaster is more predictable than the Atlantic hurricane season, let alone California earthquakes. In good times, the politicians spend like drunken sailors — increasing the spending base — and then when the economic cycle inevitably turns down, they wonder why the state is broke.

The end of the dot-com bubble brought the 2003 recall of a governor, who was replaced by the governator; this year’s budget problems are playing out like five years ago. In 1991 — when California had to pay the peace dividend through aerospace layoffs — Republican Pete Wilson faced a then-record $14 billion deficit, raising taxes to pay half and cutting spending for the rest.

This week, teenagers (encouraged by cynical political activists) are running around like this has never happened before, making narcissistic pronouncements about how spending less on them is bad for the whole world. What prompt me to write this post was a radio soundbite, the claim of a semi-articulate student that “It’s going to impact everyone, the lack of prioritization of education in this state.”

They act as though there’s some big pot of money waiting to be spent on them, but there isn’t. The reality of state spending in a cyclical economy is that some years there is less money to spend. Since the politicians never save for a rainy day — they’d rather buy votes with spending increases or tax cuts — the best we can hope for is that they’ll pay down debt when the coffers are full.

That said, the cuts made this year by the state in UC and CSU funding will probably never fully restored. The easy cuts have been made, as when the UC replacing state funding in part by raising professional school (medicine, law, business) fees to market prices. For the CSU, we will likely see another ratchet in the inexorable rise of class size, reducing the individual attention that students receive. Special programs that have outside funding (like honors) will survive, but ones that don’t have such funding (such as our prize-winning simulation program) are likely to disappear unless they can get such funding.

Update 3:30 p.m.: I'm told price increases for CSU business schools (following the UC model) are likely to happen; as with UC, raising fees will presumably reduce state funding of professional schools so the money can be redeployed elsewhere in higher education.

That plan explains this benchmark arguing California fees are too low. It doesn't explain what will happen the next time there's a budget crisis, when the fees have already been raised.

Week in review

This week I’ve been swamped coaching my two simulation teams in the final rounds of their International Collegiate Business Strategy Competition. A long slog that began on Jan. 7 (during winter vacation) ended Saturday with both teams victorious.

However, I wanted to comment quickly on a few items:

• The WSJ had a great article (available free) on how Vizio used offshore manufacturing to come from nowhere to be one of the top TV makers — in a virtual three-way tie (with Sony and Samsung) for the most LCD sales in North America. Consumer electronics has been a brutal commodity business with entrenched competitors and (except for flat panels) excess capacity, so Vizio’s success (using open innovation) should be an inspiration for upstarts everywhere.
• Red Hat has beat a retreat from the desktop Linux business. Which Windows advantage matter most — the one from network effects or switching costs? (The exact question I tried to answer with my dissertation). I don’t know, but If Red Hat can’t make it, it’s hard to see how Linux is going to be a major factor in consumer or business PCs — at least in countries with high existing PC penetration rates.
• Adobe’s new Photoshop Express website got a very nice writeup in the WSJ — which basically said it’s about as good as the 1.0 of an online photo program can be. This shows that not only is Adobe trying to remake itself into a SAAS company, but its skills are transferrable. Also that by requiring Flash, its can continue to use its position in one software segment to boost another.
• Some (but not all) of the 4G wireless equipment makers agreed to a patent cooperating agreement to speed adoption of the GSM/W-CDMA derived LTE technology. It’s not clear if the parties have agreed to a formal pool or a set of rules — either for valuing patents or (as announced in August) for deciding which patents are essential. Given the past failure of telecom patent cooperation, this seems more like a promise to agree rather than an ironclad agreement.
• The patent “reform” bill S.1145 seems to be dying, with those big IT companies that want to weaken patents (e.g. Apple, Cisco) unable to overcome the opposition of those that like them just as they are. I wonder if anyone in D.C. understands “win-win” — such as recent efforts to make patent examination more rigorous and accurate.

Making sense out of chaos

On Wednesday, MIT meteorologist Edward Lorenz died. The official MIT obituary and various news reports (e.g. the LA Times) credit him with inventing chaos theory. Actually, more precisely, a 1972 AAAS paper by Lorenz coined the idea of the “butterfly effect”.

The 1972 paper has only a small number of citations in Google scholar, consistent with the known limitation of the Google metric for measuring influence in the 1970s and 1980s. However, Lorenz’ 1993 book, The Essence of Chaos, has 440 citations.

Alas, this is all a surprise to me. I had not heard of chaos theory (or his contribution to it), when I knew Prof. Lorenz as the chairman of the MIT meteorology department, a job he held from 1977-1981. In my last two years at MIT, I was an undergraduate meteorology major from 1977-1979; they didn’t have an official undergraduate major, so I designed my own (which was later copied by my classmates, Patricia and Norm, who unlike me used their forecasting skills after graduation).

At the heart of the major was taking 3 of the 4 required first-year classes for the S.M. degree in meteorology: 2 semester of dynamic meteorology (equations of air flow) taught by Lorenz, and 2 semesters of synoptic meteorology (forecasting with paper isobar maps) taught by Fred Sanders (who died in 2006). The first semester, I got As in both (my best semester at MIT) but because Lorenz’ class was more predictable (math rather than the black art of prediction), I only took his class in the spring.

The two men were as opposite as night and day. Sanders was gregarious, affable, perhaps a bit loud (or at least theatric), and eager to be liked; Lorenz was quiet, shy, and very transactional in dealing with students. As one of his successors at MIT, Kerry Emanuel, told the LA Times

Lorenz was also "a perfect gentleman, and through his intelligence, integrity and humility set a very high standard for his and succeeding generations," he added.

Lorenz, Sanders and my advisor Reginald Newell — at one point the world’s leading climatologist and the original global warming skeptic — were the backbone of the department, the concentration of midcareer (the most productive phase) talent then not available anywhere else in the world. (As a prospective grad student, I looked into it).

They accepted me for the PhD program, but at age 21 I was sick of school and returned home to California. So I didn’t get a PhD until 42, and in a social science on the West Coast rather than a physical science on the East Coast.

The ebb and flow of a MySpace-enabled life

Once upon a time I was a college journalist, and later on I worked for a small daily paper. Today, it’s painful to look at some that early work and see how, well, amateurish it was in both its construction and its conception of the world.

Here at SJSU, our student paper is the Spartan Daily and it’s filled with wanna-be journalists who have to crank out several stories a week. (At least at The Tech, we were only twice a week). So, as with any student (or small town) newspaper, the quality is mixed.

But one thing student newspapers have is articles written by students — teens or twentysomethings. So there’s often an authenticity that can’t be captured by hard-boiled professionals in their 30s or 40s. On rare occasions, this authenticity rises above the level of “the state owes me a free education so don’t raise my fees” form of narcissism.

Today I had to sit up and take notice, when I read a great column: “MySpace lives to tell our stories” by Michael Pasaoa, a senior staff writer at the Daily.

The column starts with the premise of dead friends who live on only in MySpace. Some remain listed among the “Top Eight” of their friends, others get birthday cards, and all have a page left behind en memoriam for the world to find. The writing is compelling because it is serious, thoughtful and written from the heart. (In academia, a friend told me of an an analogous case of a faculty member who died at aged 36 but her co-authors got her papers published posthumously).

But then Pasaoa segues into the broader message of the MySpace generation: that if you live your life online, then the traces (both in life and death) will be recorded online:

Our default pictures will change. From high school graduation pictures to college graduation pictures. From wedding pictures to pictures with our first children. MySpace will continue to catalog the parts of our lives that we choose to display to the public.

I'm not sure if we'll grow out of this stage and eventually stop updating, or checking for our friends' updates, but we'll never know when our time's up.

We'll always be remembered online.

For those of us over 25, the message is clear: these social networking sites are more than just a networking tool, just like cellphones are more than a way of making a phone call.

Bigger is not better

Reading about the proposed Delta-Northwest merger brings the reminder that bigger is not always better.

Big companies (like Cisco or Oracle) buying little tiny companies allows the small companies liquidity, distribution, end-to-end integration and economies of scope. The buyer can (and often does) botch it up, but there’s a possibility there for creating value.

Big companies buying other big companies is almost always a losing proposition, with myriad potential incompatibilities such as corporate cultures, information systems, sales channels and incentive systems. The CEO gets to move up in the Fortune 500 rankings, but other than that, there’s rarely anything to recommend it.

When you merge airlines, you get to add union troubles and equipment maintenance. Northwest and Delta still haven’t solved their union problem — and for that matter, neither have US Air and America West, which merged in 2005. Meanwhile, the two airlines have the most incompatible fleets in the country, with 800 planes spread across nearly every Airbus, Boeing and McDonnell Douglas plane made. Despite what the management claims, having differing planes add complexity, inflexibility and limits knowledge reuse for pilots, mechanics and maintenance hubs, among the most important assets of any airline. Added to that is that some Northwest DC-9s are more than 40 years old, fuel inefficient and long overdue for replacement.

Scott McCartney of the WSJ this morning has a marvelous article about all the problems of mergers over the past 40 years. (An article that the WSJ is sharing free). Here are the payoff paragraphs:

"The track record of airline mergers is checkered, with few examples delivering on promised benefits," Standard & Poor's airline analyst Philip Baggaley said in a research report.

UAL Corp.'s United Airlines bought Pan American's Miami hub and South American routes -- and lost all of it to competitors. Delta bought Western Airlines and a hub in Los Angeles, and has little to show for it except a nice, underutilized terminal at Los Angeles International Airport. Delta/Western carried 12.4% of all passengers at LAX in 1988, the first full year after their 1987 merger. Last year, Delta had just 7.6% of the passengers at LAX. And Delta/Western is considered one of the more successful airline mergers.

AMR Corp.'s American Airlines bought AirCal and Reno Air to compete up and down the West Coast, but nearly all of that flying has gone to other carriers. US Airways Group Inc. bought Pacific Southwest Airlines on the West Coast and wiped the smile off of PSA planes. The result was the same -- US Airways retreated from the West Coast.

In McCartney’s article, one expert flatly predicts “If Delta and Northwest merge, in a couple of years they will be smaller than they are today as separate entities.”

The lesson for airlines is the same as for tech mergers: if you have a troubled company prior to the merger, the merger isn’t going to fix the underlying problems. But it will introduce confusion, chaos and uncertainty to a company that already has problems. And perhaps introduce ambiguity about CEO performance that allows him (her in the case of Carly Fiorina) to keep his/her job for another few years.

No taxes on iTunes ... for now

Attempts by the California government tax iTunes downloads have failed, if only temporarily.

To avoid painful cuts, state legislators are looking everywhere for new sources of revenue. Democrat Charles Calderon introduced AB 1956 to tax digital downloads, but to avoid the Proposition 13 requirement (for a 2/3 vote on new taxes), tries to impose the tax through a reclassification.

The bill stalled (died?) in the Assembly Revenue and Taxation committee Monday. The only publication to report on the story was the Merc, who said the bill got only 4 votes (one Democrat voting no, one abstaining) and needed five. Since the committee had 6 Democrats and 3 Republicans, presumably this meant a vote of 4-4-1, with all Republicans opposed (but the Merc doesn’t say). There is no official vote in the legislative record, presumably because Calderon has asked for reconsideration to twist more arms to get his fifth vote.

A story last week about the tax plan explained the revenue goals as follows:

The Board of Equalization believes state and local revenues would increase by about $114 million a year, but Calderon's estimate, which he said includes pornography downloads, is about $500 million.

Some (including Board members in charge of collecting the tax) say that the tax increase will encourage a shift to illegal downloads. One thing it will clearly do is give Apple’s out-of-state competitors (such as Amazon) a price advantage, since from a practical standpoint they cannot be compelled to collect the tax.

Pro-tax politicians consistently underestimate the impact that taxes have upon people’s behaviors — i.e., the steps they will go to to avoid paying the tax. (Remember the “luxury” tax). So even if Apple is a sitting duck for $100 million in download taxes (less whatever market share it loses to Amazon), the expectation value for porn downloads should be zilch. Nada. Zip. If ever there was an industry that will flee state jurisdiction to avoid taxes, this is it.

Perhaps Calderon is being paid off by Las Vegas real estate interests, who need the porn industry to relocate 270 miles northeast to prop up commercial real estate rents. That — or support from Apple’s competitors — is the only logical reason why the state would want to pass such legislation.

Send in the clones

Since the Intel-based Macs were introduced in June 2005, various analysts have wondered what would stop the maker of a PC clone from advertising Mac OS X support.

WIth the technical barriers relatively low (particularly since Apple switched to EFI), the only thing holding back clones was the vigor of Apple’s IP enforcement lawyers. Apple’s reputation was made more than 20 years ago with its various lawsuits against the Franklin Ace, Pineapple and other Apple II clones. Thus, it was not surprising that OS X compatibility was not something promoted by reputable established Wintel manufacturers.

Instead, it was tiny Florida-based Psystar (YALBNdtCS) that Monday announced its Open Mac (which soon became the Open Computer). Its web server has since been unable to cope with the traffic.

The key issue is that the license on Apple’s OS X software says you can’t use it on non-Apple computers. Based on the comment of a semi-anonymous Psystar employee, today the news is that Psystar will challenge that condition as anti-competitive. (Charging an 80% gross margin on the Mac is not illegal — that’s where their $782 million in R&D gets funded).

I share the view of at least one commentator that this will be a flash in the pan. (One report says Psystar has already given up). But the company has now emerged from obscurity — as Franklin did — and will be able to sell other products using its 15 seconds of fame.

Intel wants to own mobile phones, too

This morning I saw an interesting tidbit about Sharp developing an Intel-based cell phone for the Japanese market, to be sold by operator Japan Willcom. With 4.6 million subscribers, Japan’s 4th largest mobile carrier has less than 10% of the share of market leader DoCoMo.

The D4 phone uses Intel’s Atom CPU of the Centrino family, and will run Windows Vista (and for some reason, not XP). It has a 1024x600 screen and a 40gb hard disk. UMPC Portal describes the keyboard as “quite useable in a Psion-5 kind of way.” As such, it fits into the UMPC/MID category rather than a true cell phone, and in fact Willcom doesn’t expect to sell more than 100,000 a year.

Will this be a beachhead for Intel’s diversification into dominating (and displacing ARM) as a mobile phone platform? Intel’s prior diversification efforts have had their share of missteps. Intel’s previous attempts at the low power chips Xscale were spun off to Marvel, while its vertical integration into circuit boards also failed to displace the Taiwanese makers.

Frankly, I think Linux (not Windows Vista) is the growth opportunity Intel in the mobile space, as with its Mobile Internet Devices and its (Nokia-derived) Moblin technology. With web browsers, e-mail and IM clients available for Linux-based tablets, about the only thing an ultraportable Vista has going for it is native support for Microsoft Office documents. And if OOXML is really a standard, then that will eventually be available on Linux too.

Blockbuster's cash cow

Stuck in a declining business — storefront video rentals — Blockbuster today confirmed that it wants to buy another declining business. The nation’s largest video rental chain said today that it has offered $1-$1.35 billion cash for Circuit City, the country’s second largest electronics dealer. The news sent shares of Circuit City soaring.

The offer was made in February, but Circuit City has not cooperated with the friendly offer by opening its books. Until it does, Blockbuster can’t make a definitive offer.

This reminds me of a favorite b-school case on related diversification. Viacom merged with Blockbuster in 1994 to get the cash flow to finance its purchase of Paramount Pictures (and later CBS). After a decade, it noticed that video rentals were a declining business and thus decided to dump the shares via a share distribution.

If the idea of combining Blockbuster with Circuit City is an end-to-end contender for delivering digital movies (in competition with Netflix and Apple), Seeking Alpha suggests that Blockbuster doesn’t have a clue. Instead, writer Scott Berry suggests that Blockbuster will have to partner to get a top quality hardware solution to compete with either.

Open innovation — partnering for success — seems like such an obvious concept. Except to media moguls used to controlling the end-to-end value chain.

Prize winning (age appropriate) science

Although I have a backlog of topics, my blogging this week has been deferred as I led a group of volunteers to put on the science fair at our local elementary school. I was on the committee that created the science fair four years ago, was co-chair last year and (titular) sole chairman this year (although the committee of four spread the work pretty evenly).

As with last year, my main role was coordinating judging. This year we had 27 judges evaluating 71 projects by 97 5-11 year-olds. We didn’t have science fairs when I was in elementary school, but in junior high school I participated in the Greater San Diego science fair and even won the jr. high math category twice — the second time (1972) with what I think was the first-ever winning computer project at the GSDSEF.

I started judging in 1989 at the regional championships for middle school and high school students, and I have judged almost every year since — first in San Diego, now in Silicon Valley. My only concession to burnout is that three years ago I switched over to judging for the local IEEE chapter, in part to try to become more integrated as an IEEE member. I find the professional society judging to be less stressful and also more fun, particularly when I get to be a judge for SWE (no, not dressed like Jack Lemmon), but I’d switch back to category or sweepstakes judging tomorrow if they needed it.

I’ve roped a number of my science-oriented friends into judging, and to a man (or woman or teen) they all seem to enjoy it. Working with motivated kids is fun, and I’m sure many of them also see themselves at that age (I know I do). It’s also a public service: even though the Cold War (that spawned the SD and other fairs*) is over, the perceived need for the US to grow a supply of scientists and engineers remains. Improving K-12 science education is a part of any such plan.

(*Interestingly, while the regional San Diego fair was started in 1955 at the height of the Cold War, the national fair — the Westinghouse now Intel Science Talent Search — was started in 1942 during World War II).

With ties and team projects, we handed out 17 ribbons last night to 11 projects in 3rd, 4th and 5th grades. The best 3rd grade project ran a doorbell using a lemon battery, while the 4th grade project built and calibrated a thermometer. I didn’t see the 5th grade projects, but both were in life sciences — one extracting DNA from strawberries, the other measuring the effects of disinfectants on bacteria.

What was also interesting was that half of our six-girl prize-winning robotics team entered the fair, and all three won prizes. One of those winners was my daughter (and her robotics teammate). While I was proud of their success, it was a little embarrassing because only the judges knew that we assigned judges so that no parent knew how their kid did until the results were announced. (As you might imagine, there was a considerable overlap between volunteer judges and parents of contestants).


However, I think the program is also a testimony to public schools at their best — highly involved and educated parents who want their kids to succeed. As in companies, a culture of inquiry and achievement is important for elementary schools. Unlike many places I have visited in the East and the South, we are fortunate that many successful Californians send their kids to public schools and then pour their energies into making those schools successful.

Photo of prize-winning thermometer construction taken by Oliver Huang.

TiVo minus 50

OK, I’m a sucker for technology history — and even more so, for contrarian views, beyond the crowds. Thus, I was pleased to see Mike Cassidy’s column this morning in the Merc on Ampex, the company that invented video taping:

It was a bold, proud Silicon Valley company with star power and stunning technology.

OK, so it was stunning 60 years ago. But Ampex, which pioneered audio and video tape recording, is still with us. And so is the towering Ampex sign honoring the company's history. You've seen it just off Highway 101 in Redwood City.

Last week, Ampex filed for Chapter 11 bankruptcy. Its head count is down to 101 from a long-ago peak of 12,000. Its shares are trading at about 40 cents. …

Ampex belongs in the Silicon Valley pantheon. It was the valley's first hip company - swinging with the likes of Bing Crosby and Les Paul. (Check Wikipedia, junior.) It's won an Oscar, 12 Emmys and a Grammy. Sure, technical stuff, but not bad bling.

Larry Ellison and Nolan Bushnell, of Atari fame, are Ampex alums. The company gave us Ray Dolby. Yes, the Dolby Sound Dolby. Ampex developed video recording (yes! reruns!) and slow motion. It was TiVo before TiVo.

Fortunately, Ampex’s role on the communications and electronics industry has not gone entirely unnoticed:

Henry Lowood, curator of the Stanford University Libraries' Silicon Valley Archives, is down with the Ampex appreciation crowd. It's an occupational hazard given that Lowood oversees hundreds of thousands of artifacts in the library's Ampex collection - everything from washing-machine-size videotape recorders to scraps of paper from the days Ellison was on the payroll.

It wasn’t just a technological pioneer, but a cultural one as well:

[B]ack in the 1940s, Ampex had the Bingster. Crosby realized this tape-recording thing had possibilities - not the least being that he could record his live New York radio show and replay it three hours later for the West Coast.

Ampex, Lowood says, was a culture company as much as a technology company. A culture/technology hybrid like Google, Pixar, Yahoo, Apple and others are today.

The company was out in front in other ways, too, says John Leslie, an Ampex booster from Portola Valley. Leslie worked with Ampex from the 1940s to the 1960s and eventually became company vice president. Ampex was a start-up before there were start-ups.

Its early engineers knew they were onto something and they were determined to push it to the limit.

Alas, its market cap has fallen to $1.5 million because it's losing (at last count) $4 millon/year. But even if it doesn’t make it, it seems Ampex’ place in history is assured.

Photo: Stanford University Libraries via the San Jose Mercury-News

End of an era

Yesterday's mailbox contained news of the end of an era in entrepreneurship research, with the death of Jeffry Timmons:

Dear Colleague:

Babson College is deeply saddened to announce the unexpected death of our dear friend, colleague, teacher, and mentor, Professor Jeffry Timmons, on April 8 at the age of 66. On Monday, April 7, Professor Timmons spent the entire day at Babson with a small team discussing the history and future of entrepreneurship. He was brilliant in the way that he shared his insights, knowledge, and enthusiasm. His passion, as always, was striking.

Professor Timmons was known internationally for his research, innovative curriculum development, and teaching in entrepreneurship, new ventures, entrepreneurial finance, and venture capital. Inc. named him the “Johnny Appleseed of Entrepreneurship Education.” His doctoral dissertation, “Entrepreneurial and Leadership Development in an Inner City Ghetto and a Rural Depressed Area (Harvard, 1971)” was the first use of the word “entrepreneurial” in a dissertation title. He believed, in his own words, that “the entrepreneurial process is not just about new companies, capital, and jobs. It’s also about fostering an ingenious human spirit and improving humankind.” He was feverishly committed to advancing entrepreneurship.

Professor Timmons’ impact and influence on Babson and the global entrepreneurial community is unparalleled and his passing is a huge loss. We are truly sorry to have to share this news with you.

Patricia Greene Ph.D., M.B.A
Provost
Professor of Entrepreneurship

The Timmons textbook (now in its 7th edition) defined the field of entrepreneurship as an academic discipline, and dominated the field to a degree that I have not seen in any other field. Timmons also co-authored books on business plans and raising capital.

His textbook and his other articles (particularly on venture capital) are highly cited in the field, and it seems unlikely that entrepreneurship academics will ever again have so dominant a figure.

The business of mobile Web 2.0

This has been a busy week, with a trade show, a seminar, teaching two courses and a small academic conference. So now I’m just getting caught up.

On Monday’s Smartphone Summit at CTIA, I moderated a panel entitled “Smartphone Interactivity (Social Networking & Personal Communications)”. This was a reprise of the same role I held back in October.Even more so than in October, we had an elite panel:

• Jason Ling: Senior Product Manager Mobile Products, MySpace
• R. Paul Singh: President and CEO, PixSense
• Bill Tam: CEO, EQO
• Jennifer Vancini: Sr. Director Market Development, Symbian North America
• Boaz Zilberman: Chief Architect, fring

Without canned presentations, we did a roundtable discussion on a series of key questions (suggested by my panelists) and (alas) only one or two from the floor. This is one of the very best panel discussions I’ve ever been involved in — we were really in the zone, with very little dead time, digressions, ”me too” comments or other problems endemic to panel discussions.

Obviously, being on the panel, I couldn’t take realtime notes, but below is what I captured after the fact.

What is “social networking"?
Bill Tam: “How are you going to communicate with people that matter to you”.

Is mobile social networking distinct from the larger domain of social networking?
Jason Ling: MySpace is platform agnostic, because it’s just another way to access the same information. You want to have the most possible devices.
Paul Singh: the idea of platform agnostic is mainly a US concept, because people in most of the world don’t have other access devices.

Is the future of mobile social networking in browser-based or native apps?
Boaz Zilberman: web apps are best for content, while native applications are best for communication — particularly when integration with other phone functions (e.g. the adress book) is required.

Do location based services matter?
Two biggest barriers to LBS are not technical, they are privacy concerns and fragmentation. Fragmentation is both carrier APIs, and also the fragmentation of national policy regulations.

Does ubiquity make mobile services more useful than PC services?
Again, not everyone has a laptop. But there are some applications (e.g. twitter) where constant availability allows you to really share with your friends what you are doing on an ongoing basis.

How does the US compare to elsewhere?
Interestingly, much of the technology is developed in the Bay Area, but even their main markets are overseas.

What do we do about spam?
Many Friendster “friends” are scams or commercial ties, as with blogging comments or search engine optimization. Where there’s money, people will abuse the system — as with telemarketers. The problem with social media will end the day that junk mail ends.

How do you make money?
The list was fairly conventional

• Mobile ads. Many teenagers (raised on Napster and Kazaa) expect free. Social media often has very good information on the user (or his/her ties) that inreases the value of ads.
• Intermediary/portal. Fring is reselling other services such as VoIP to PSTN) which provide revenues (at least until that gets commoditized).
• Royalties/licensing technology. PixSense sells services to carriers and others that want to offer this, but want to run their own services.
• Subscriptions. More common in other countries
• Transaction fees. People pay for ringtones, and will sometimes pay for other stuff.

Still, this list of ways of making money seems a bit like dot-com models of the late 1990s. Yes, Amazon and eBay collected a fee on every transaction, but others hoped to monetize via banner ads. Google was able to serve a very broad audience and bought code for targeting ads, and thus became the master of monetizing eyeballs, but many other companies failed to get enough revenues (which gave us the dot-bomb era).

Outside the session, one attendees speculated that the business model is exit via rolloup — get bought by some big firm that needs a portfolio of services to offer. In other words, spend your VCs money until you can convince Google (or Yahoo or MSN or Fox or AOL) to bail out the VCs.

Understanding the iPhonatics

At CTIA this week, Rubicon Consulting released a survey of 460 US iPhone users. The 35 page study is signed by Mike Mace, co-author of my iPhone paper.

A few key points:

• the most time is spent on e-mail, but the device increases browsing too.
• a third of the audience carry a second phone.
• the iPhone increased bills by $228 annually, half of the users switched to AT&T, and AT&T gained an additional $2 billion in annual service revenue.

About 40% switched from other smartphones — which in the US are not surprisingly Blackberry or Windows Mobile — and 50% switched from another phone such as a Motorola Razr. 75% of the customers either own an iPod or Mac.

The report listed two major challenges. First, the WebKit-enabled iPhone browsing doesn’t work on certain websites. (The report doesn’t mention it, but Nokia S60 uses the same browser technology).

Second, the iPhone has won the most innovative users,† but can it appeal to a broader market? This was a question for the iPod and Newton, too — one made it and the other didn’t — although the Newton never even got close to early adopters, let alone the “chasm”.

My rough reading is that Apple is roughly on track — it’s achieved its beachhead, but it has a long way to go to become mass market. And (as with any innovator) its rivals are not going to stand still.


† The report says “early adopter”, which is a technical term in innovation diffusion research that specifically refers to a market penetration of 2.5-16%, but is often misused by practitioners to mean anything in the first 15-20%. With a 17% share of new North American sales in 2007 (not installed base), early adopter (“visionary” in Geoff Moore terms) is a plausible categorization for the US. But in Europe, it’s clearly at the innovator (Rogers) or enthusiast (Moore) stage of 0-2.5%.

Mobile phone cuts

Just a few tidbits of news today.

Deutsche Telekom is cutting prices of the iPhone, from €499 to €99 (or to have a monthly bill of €29 with a €249 up front charge). This has all sorts of implications. It might reflect an abject failure of the iPhone in Germany, or it might be clearing out inventory for the 3G phone. Or it might reflect a shift of Apple’s strategy to have a range of price points and make the iPhone more widely dispersed.

Motorola is making another round of job cuts, axing 2,600 today. They will have 63,500 at the end of the cuts, versus 147,000 in 2000. Among the casualties is their Birmingham design centre (née the startup Sendo); alas, instead of half (60) of the workers, they are dumping all 120. Motorola has yet to bottom out: as with Apple a decade ago, it needs to come up with a way to increase innovation and top line growth, not just cutting costs.

Finally, (on an unrelated note) Microsoft has modified its plans to dump Windows XP on June 30. While that’s still the planned end date for the developed world, it will be keeping XP for cheap PCs in the third world.

Commoditization: our own damn fault

Over the past two weeks, I’ve been reminded (often painfully) of the origins and consequences of commoditization, in the disparate segments of computer components, musical instruments and airlines. All tie back in some way to consumer decisions that fuel price competition and thus globalization.

Computers. On March 25, the hard disk died on my laptop, ruining the rest of my spring break and most waking moments since. It was a two year old third party drive that I installed on my 6-year-old PowerBook, and it died without warning as I was downloading some e-mail outside the Oceanside library.

When I got home, I began the laborious process of restoring data from backups on two external drives made by Seagate and Western Digital, complicated by the drives not working reliably with my host computer. (Is this due to faulty interfaces in the drive? In the computer? I can’t tell).

For both the external disk drives, I bought something cheap when I had the opportunity. Of course, I bought these drives to be reliable sources of backups when I really needed it (i.e. now). As I whined to friends and strangers over the past 10 days, someone pointed out that it’s quite possible for companies to make computers that would last 5 or 10 years, but nobody would pay the price. In fact, Google’s (and other) server farms have been architected to use cheap unreliable blade computers, and to throw them away rather than fix them.

Musical Instruments. While in Oceanside, my daughter picked up a used Gemeinhart starter flute to use for her second year of flute lessons. In asking around, experts told us not to buy a new Gemeinhardt flute in that category, because the quality of these Chinese-made flutes is not as good as the ones that they used to sell 10 or 15 years ago. While this may be a direct globalization effect, globalization is really a response to broader commoditization pressures.

The exact same arguments were made about Fender guitars (Stratocaster, Telecaster, Precision Bass) after the owners sold out to CBS in 1965, and CBS cut costs and ramped up production to get growth by reaching a wider market. For decades you could find advertisements for used “pre-CBS” guitars which were held to be superior to those produced by the conglomerate.

Unlike most firms, Fender got really clever about this and gave consumers a choice. If you walk into Guitar Center (the big box store that itself fuels commoditization) or online to Musician’s Friend (ditto), you can buy a U.S. Fender, Mexico or an Asian-made cheapo.

Fender and the rest of the guitar industry segmented their line into the crappy and main product lines. For starter users, Fender has Squier, Gibson has Epiphone, Warwick has RockBass and Washburn has Lyon. This means that teenagers just starting out can get a guitar at Costco for $100 or a full kit (with amp) at Amazon for $200, while working professionals (or middle aged garage musicians who really care about quality) can buy an American guitar for 5x or 10x that.

Airlines. Airline maintenance problems have been in the news recently, and disgruntled unions have attributed the problems to offshoring of repair work (which is not completely true since Southwest had the first and most serious problems, and they don’t offshore anything).

However, the issue has been brought home to me because I’ve passed through SJC Terminal A four times in the past eight days, including this morning at the ungodly hour of 6am. This is the home of Southwest and American, the two airlines that fly to San Diego, and thus a familiar sight during the period we were winding down Palomar Software while living up here.

What was shocking was to see last week how American has beat a retreat out of San Jose, the hub that it inheirited with its 1999 purchase of Reno Air. This week Terminal A 8 gates for Southwest, 6 for AA and 2 unused; a year ago, it was 6 gates for WN and 10 for AA.

Some have said deregulation was a failure. That’s b.s. (and I don’t mean Barbra Streisand). Deregulation did exactly what it said it would do: increase consumer choice and reduce prices. My first flight to MIT in 1975 cost $400, and before the collapse of the dollar pushed up oil prices, you could buy that same transcontinental ticket in today’s competitive market for $102 in 1975 dollars (after adjusting for inflation).

That’s not to say that deregulation is without consequences, one of which is that airlines go under. This morning’s paper said that Alitalia may be going under, because the government can’t square its protectionism (against foreign takeover) and desire to preserve Italian jobs with the fact that bloated inefficient carriers will lose millions if not billions in today’s competitive market.

In the US, two recent examples include Aloha and TWA. On Monday, 61-year-old Aloha threw in the towel because it couldn’t compete with low-cost go! owned by Mesa Airlines (after two years of whining). However, for the first time in decades (if ever) Hawaiian consumers had real competition on inter-island fares that those of us in California and Texas (with cars as substitutes) have enjoyed for decades.

This morning I got on a DC-9 (aka Super-80) flight to St. Louis for a conference. AA didn’t own any DC-9s until its 2001 purchase of TWA, Howard Hughes’ onetime global flagship of luxury travel that was no longer protected by CAB-padded fares after dereguation. After after AA bought TWA, this flight remained a nonstop to TWA’s longtime hub in St. Louis, but last July AA closed that hub, so today I had to get up two hours earlier to detour via Chicago.

Analysis. Commoditization is real, and irreversible. It has good and bad consequences.

“Consumer” advocates (often funded by unions) often want to use regulation to restrict entry or push up costs. Certainly airlines and drugs and auto restraints need to be regulated for life-and-death reasons, but that shouldn’t be a smokescreen for other forms of regulation that distort the marketplace to help those who have the ear of politicians.

I think the guitar example is the best example of markets at work. Consumers have full choices and there seems to be a well-developed market of people who will pay a premium for better products.

Sometimes we don’t have accurate quality information, but even if we do, there’s a limit to how much of a premium such quality commands. If I knew that one hard disk was more reliable than the other, then I'd be interested in paying a premium, but I might not buy the more reliable model. If it’s too expensive, I would use a RAID drive that assumes spindles will fail, or go to a hosted service (such as Mac.com) that guarantees reliability.

Europeans claim that Americans have bias towards cheap over all other. That might be true, but in other cases short-term thinking can make sense: you get what you pay for and sometimes what you want is cheap.

But thinking short-term and buying the cheapest product is always an individual choice. For a wedding gift 16 years ago, my wife asked for a KitchenAid mixer; since then we have given away at least three as a wedding gifts (plus a fourth to our goddaughter). Yes, in these Wal-Mart days it seems strange to pay $200-$300 for an appliance, but my mother-in-law has been using the same mixer for 40 years and Elizabeth hopes to say the same thing to her own daughter.

Airlines are a little more problematic. AA has almost given up on San Jose because (like everywhere else) people are flying Southwest. If they can both take you 500 miles in an hour and a half, is it illogical to expect to pay the same price? No. The problem is, with its union salaries and work rules, AA can’t break even unless it can sell seats at the higher price — and on routes where it competes with Southwest, it rarely can.

Buyers can say they will pay more for something that save high-wage jobs, but they never actually do it. However, at least some buyers will pay a premium if they get more — better quality, reliability, performance, status. The American-made Telecaster or my iPod are two examples. Of course, maintaining an advantage over commodity products is a never-ending battle.

Commoditization is changing nearly every industry, and businesses need to deal with it. Chris Anderson (of Long Tail fame) is writing articles and doing a book about the ultimate level of commoditization: Free. I look forward to critiquing it.

MySpace music is no iTunes killer

Apple is now (semi-officially) the America’s largest music retailer, a position that many other entertainment, e-commerce, IT and other companies covet.

One of them might succeed in displacing Apple. Dell knocked off Compaq, and the Japanese have helped Detroit in its CFIT. But generally I’m skeptical of the wannabes, since nearly all (or maybe all) will fail: a late “me too” strategy is a guarantee of that.

That’s why I took notice of today’s MySpace deal to distribute songs (and other products) for three of the big four labels. It is not “the latest iTunes killer,” because it’s something more: similar functionality but delivered in a significantly different way. And building on a website that’s already the top social networking site in the US, which has some opportunities to deliver value in a way that the iTunes Store does not.

The one problem I see is that because the site (unlike Amazon’s) is continuing to push DRM-infested tracks long after consumers and industry have spoken, that implies that a) the record labels are calling the shots and b) they still are in denial.

OO - XML!

Microsoft Office has been one of the company’s two major cash cows over the past decade. While habituation and sales relationships are certainly important, it has been the Office file formats that have created tremendous switching costs and barriers to entry.

So Wednesday’s announcement that IOS has approved Microsoft’s current family of file formats (OOXML) could be a major milestone. Maybe. Possibly. Right now it’s an open question if the actual openness matches the nominal claims.

The decision would be significant if it reduces barriers to entry by rivals, who should now be able to read native Office documents without worry of incompatibility. Such alternatives should benefit (and fuel) reduced switching costs, and perhaps lower prices.

The problem is that a lot of cyberactivists think of open office formats as meaning favoring one particular project/product, OpenOffice.org. That’s not really choice and freedom, it’s just using public (or private) institutions to favor one actor over the other.

The real benefit will be if we see a proliferation of new products (free and commercial) that can read and write OOXML. It may be an ugly format, but open source libraries will make possible for innovators to reuse that commodity technology to create something new and valuable. Such open innovation would either improve the quality of the OOo libraries or perhaps lead to a new, cleaner implementation.

For me, the biggest benefit of an open standard would be the end to file format obsolescence. When I started my PhD career in 1994, I did a number of presentations in Macintosh Power Point 3. Office 98 read these files, but I can’t read them today on my computer using any of the OS X implementations — Office X, 2004 or 2008 (I dont recall whether it works in Office 2001).

So the idea that I can save portions of my life and read them 10, 20 or 30 years later is pretty important, and perhaps an open standard will assure that outcome. Through a combination of openness and market adoption, I know HTML, JPEG and TIFF files will be readable 30 years from now, but the odds seem lower on these semi-open file formats (like PDF and OOXML) that are deliberately revised every few years to sell software updates.

Microsoft, Google on a roll

InfoWorld has an exclusive today on a resolution to the Microsoft-Yahoo impasse. They report that the poison pill has limited the upside on the sale price — from MS or anyone else — so that Yahoo has conceded the inevitable.

But Sara Ruiz, an analyst at RGB-Tech, said the deal was inevitable, given Microsoft’s mediocre efforts in the Web services and online advertising markets, the rising threat posed by Google, and Yahoo’s own loss of momentum in recent years.

“This couldn’t have played out any other way,” Ruiz said. “And that’s why the final price was not much more than Microsoft’s original offer.”

Ruiz said she expects most of the Yahoo’s senior management and board to quietly exit as the Microsoft takeover plan is implemented.

“We’ll see a lot of startups helmed by former Yahoo employees next year,” she predicted. But she thought the engineering and Web development staff would be showered with incentives to stay, including the ability to choose non-Windows computers if they wanted, as rival Google allow.

Chief Yahoo Jerry Yang will be joined in Redmond by InfoWorld’s own Robert X. Cringely. The two will have three months to learn everything that Bill Gates knows before Chairman Bill completes the transition from ruthless capitalist to benevolent philanthropist.

Overall, it was quite a day for scoops by InfoWorld, with two major acquisitions by Google, updates on Mac OS XI and iPhone Enterprise Server, and the long-awaited news on IBM’s System z. The router faceoff sounded intriguing, but it would have been better with a video.

Smartphones: where we are

Monday I reprised my appearance at the Smartphone Summit, held in conjunction with the semiannual CTIA trade show. In addition to moderating a panel, I got to attend the rest of the conference.

The most new information came from the opening panel of mobile phone industry analysts:

• Mark Donovan - Senior Vice President & Senior Analyst, M:Metrics
• Pete Cunningham - Senior Analyst, Canalys
• Andy Castonguay - Director - Consumer Research, Yankee Group
• Bill Hughes - Principal Analyst, In-Stat
• Jonathan Goldberg - Senior Analyst, Deutsche Bank Equity Research

I’m used to having panels with stars and duds, but this was one of the largest panels I’ve seen at any show where everyone was first rate.

There were a lot of interesting presentations of data. One was the Canalys summary of the 2007 smartphone OS market share in North America and EMEA (Europe, Middle East, Africa):

	EMEA	N.A.
Symbian S60	34.8m	0.5m
Windows Mobile	5.0m	4.9m
Blackberry	2.3m	9.2m
Symbian UIQ	1.5m
iPhone		3.4m
Palm OS		1.4m
Other	1.3m	0.3m
Total	44.8m	19.7m

This gives more specific data about US vs. Europe and full year statistics that were not available in the Q42007 data released in February. Canalys is expecting a 50% CAGR for smartphones from 2004-2010.

There were other interesting comparisons between the two regions:

• Smartphones in the US are 2/3 enterprise while Europe is 2/3 consumers. Sales in the US are distorted by American addiction to handset subsidies: consumers don’t buy phones without subsidies. so cheap smartphones (think Palm Centro, RIM Pearl) sell but expensive ones do not.
• In the US, users (including teens) with PC experience want keyboards for e-mail and text, while European teens are quite happy with T-9. (At least one of the panelists shared my view that everyone wants good input and small form factor suspect others are like me and want both a small phone and a keyboard).

The In-Stat data on US users was also really interesting:

• Did users install any mobile phone apps (i.e. themselves, not their employers). The mean has creeped up from 1.54 in 2005 to 1.83 to 2007, but the histogram more interesting: none (30%), one (17%), two (19%), three (10%), four or more (25%).
• Phones are used as PC extension (53%), laptop replacement (17%), desktop phone replacement (17%). (The most interesting is that 30% of the users are just using it as a feature phone — the Smartphone OS is used by the manufacturer as a way to software-configure features, but the users don’t treat it as a smartphone.)
• Average ARPU per customer: $81 corporate-liable (company direct pay), $59 business-personal (reimbursed by company), $48 personal and unreimbursed business, and $26 pure consumers.

However, the In-Stat slide that got everyone's attention was the discussion of correlating platform strategies to vendor profitability. (I tried to grab my camera phone but was too slow). Hughes claimed that of the top 13 vendors, all of the vendors with simple platform strategies (2 or less) are profitable, and all those with complex ones (3+ platforms) are not. (For #14, it's so small that it doesn’t make money even though it has a limited number of platforms).

The first mention of the iPhone was Hughes asking if the iPhone is a “smartphone” — even with the recent SDK, the audience was evenly divided. (It is certainly a good web surfing device, extensible by web apps, so I think it would be silly to claim it is not “smart”). No one expects the iPhone to succeed in the enterprise, except perhaps in a few vertical markets like advertising.

Everyone agreed the iPhone is having a major impact on the industry. As Goldberg said: “In the U.S., consumers are suddenly interested in smartphones and aware of smartphones in a way they weren’t before.”

The crystal balls were otherwise cloudy. Are sales disappointing in Europe (France, UK, Germany, Ireland, Austria) due to the price? The form factor? (The lack of ITunes store penetration?) Or because it’s not yet 3G?

Still, I thought it gave a really good overview of where smartphones are today in the US. The one thing I’d add is the Rubicon Consulting iPhone study, which is being unveiled today at the main CTIA conference.

Free Public WiFi

I’m here at McCarran International in Sin City, en route home. Unlike some airports, they are nice enough to provide free Wi-Fi, with the logical SSID “McCarran WiFi”.

However, when looking around for a hotspot, I saw the ubiquitous “Free Public WiFi” node. From the OS X menu bar, it’s obviously another computer (turns out it’s Windoze) and not a real hotspot. A quick Google (on the McCarran Wi-Fi) showed this explanation from TechBlog which sees it as more benign than a ZDNet posting).

To be on the safe side, I never connect to these peer networks, which points out a security hole in OS X 10.5 (Leopard). When you go to a new location, OS X puts up a window showing all available Wi-Fi connection options, and does not indicate (or give a warning message) for those that are peer-to-peer rather than legitimate base stations. So at the menu bar, the risky connection options are segregated, but not in the screen that everyone sees first.