Big picture: technology trumps financial engineering

From the WSJ Wednesday:

For all the Fed has done, it hasn't managed to spur job creation. U.S. output may be returning to prerecession levels, but the total number of nonfarm workers still is more than seven million shy of its December 2007 peak, and in fact is back at 1999 levels.

More broadly, the Fed's failure reflects a longstanding flaw in its approach. For years, it has been pushing interest rates lower, doing so after each successive downturn as inflation became less and less of a concern. But that wasn't simply due to successful monetary policy. Technological innovation, the globalization of the work force and demographic change had plenty to do with it, too.

Instead of being a cure-all, the Fed's policies spawned two great asset bubbles, first in stocks, then in real estate. Economic rebounds and job creation lagged behind, despite the Fed's Herculean efforts.
…
The only real fix is to lower the cost of U.S. workers relative to foreign rivals and machines, or else raise their bang for the buck. The latter, while clearly preferable, requires education and training that won't turn things around overnight.

Google's war on semi-open standards

Google stirred up a controversy this week with its decision dumping H.264 video codec support from its Chrome browser in favor of Flash and its own WebM (VP8).

This clearly is good for Adobe’s Flash, and bad for efforts to build a Flash-free HTML5 Internet that was (until this week) a joint effort of Microsoft, Apple and Google.

The claim that Google is motivated by openness is quite hollow. While technically a Windows browser doesn’t need Google’s help to distribute a free Flash player, Google has been very pro-Flash in its efforts to help Android overtake the iPhone.

Also, even though royalty bearing, H.264 is an open industry standard, whereas Flash and VP8 are not. Flash has only one proprietary implementation.

Still, some speculate that argument one reason is the H.264 business model, specifically that Google doesn’t like the H.264 royalties charged by MPEG LA. Here is what Google’s revised justification said Friday:

We acknowledge that H.264 has broader support in the publisher, developer, and hardware community today (though support across the ecosystem for WebM is growing rapidly). However, as stated above, there will not be agreement to make it the baseline in the HTML video standard due to its licensing requirements. To use and distribute H.264, browser and OS vendors, hardware manufacturers, and publishers who charge for content must pay significant royalties—with no guarantee the fees won’t increase in the future. To companies like Google, the license fees may not be material, but to the next great video startup and those in emerging markets these fees stifle innovation.

The idea that Google’s latest push will cause VP8 to pass H.264 is fanciful at best: it will take more than support from the #3 browser to cause the rest of the industry to shift from H.264. If anything, Google’s efforts fragment and thus undercut any efforts to establish an open alternative to Flash.

One theory is that Google wants to ditch H.264 support from YouTube (which, if true, would send iPhone users away from YouTube — good for Android, bad for YouTube.) The theory that Google hates H.264 royalties doesn’t hold water according to an analysis by Ed Bott of ZDNet, because even the worst case cost is not material for a $29 billion/year company.

Clearly there is more to this strategy than meets the eye. A company that aspires to be the (unregulated) benevolent dictator of the Internet would be more transparent about its motivations — perhaps something the next CEO will be better at.

But for now, the only good explanation I’ve found is at the comic strip “Joy of Tech,” which argues that it’s part of a cynical Machiavellian strategy by the “do no evil” crowd to retaliate against Apple and generate controversy.

Farewell to the Gaffer-in-Chief

As everyone knows by now, Eric Schmidt announced Thursday that he is stepping up out of CEO to become executive chairman. He will be replaced as CEO by co-founder (and former CEO) Larry Page.

What I found remarkable was the reaction of a friend of mine, who in response to my email about the announcement, wrote:

Eric was supposed to be the public face of GOOG, but he turned out to be ill-suited for that role---and less so as time went on. This past year? One blooper after another.

I hadn’t been paying much attention to Schmidt, so I was very surprised to see how gaffe-prone he has been.

Sure enough, in the last six months or so there were lists of Schmidt verbal boo-boos. His planned retirement brought gaffe compilations by Gizmodo and All Things Digital. Earlier lists include BuzzFeed, State of Search and Business Insider.

Many of these gaffes revolve around the issue of privacy, including these:

• “Streetview, we drive exactly once. So you can just move, right?”
• “Show us 14 photos of yourself and we can identify who you are. You think you don’t have 14 photos of yourself on the internet? You’ve got Facebook photos!”
• “Just remember when you post something, the computers remember forever”
• “I don't believe society understands what happens when everything is available, knowable and recorded by everyone all the time.”
• “We Know Where You Are. We Know Where You've Been. We Can More Or Less Know What You're Thinking About.”
• “The Google policy on a lot of things is to get right up to the creepy line and not cross it.”

In fact, “creepy” seems to be the most commonly used term for the philosophy that Schmidt has been articulating. This concern is over and above the reality of Google’s business, including its plans to (using those Facebook pictures) do facial recognition.

However, Schmidt is a noted hypocrite when it comes to the value of privacy. The official response of Google’s relentless invasion of privacy is “trust us — we do no evil”. But when a reporter used Google to research Schmidt’s personal life, the retaliation was swift and unequivocal.

So in the end, I think as a hired CEO, Schmidt was unsuited by temperament to be the public face of a market-dominant company, and all the attendant scrutiny. This is not something he experienced the head of a dying proprietary software company or being CTO of the leading company in a highly fragmented Unix market.

All the little companies that grew big had to come to grips with not being little any more: Microsoft, Intel, Apple, Google and now Facebook. Antitrust law (as well as public sentiment and populist politicians) draws a clear distinction between aggressive small companies and bullying by dominant companies, and Google’s relentless march towards Total World Domination has understandably earned it the scrutiny that IBM or Microsoft once enjoyed with people like ambitious EU bureaucrats.

Still, I think Google’s new CEO can make this argument more convincingly and sincerely. At any tech company, founder-CEO seems to have a legitimacy — and a vision — that the hired gun does not. When a Hewlett or Packard or Jobs says “we mean well” it is more plausible than from one of the few people to become a billionaire through employee stock options. (For some reason, Bill Gates was a far less convincing witness as to his firm’s benign intentions.)

So will the change in leadership solve Google’s PR problems? I don’t think so: their goal is still to crush Yahoo, Facebook, Microsoft and Apple, while commoditizing Nokia, Apple, Verizon, AT&T and dozens of other companies. You can’t march to Total World Domination without climbing over a few bodies, and right now Google’s growth depends on expanding its domination in existing segments and expanding that dominance to new segments.

2010: officially year of the iPad

The first earnings call since Steve Jobs went on medical leave showed spectacular results.

iPad sales totaled 7.33 million in the latest quarter, in addition to 7.46 million in the preceding two quarters. The total is 14.79 million of (according to IDC) 17 million tablets sold in 2010 — 87% of the worldwide market. IDC projects 2011 sales at 44.6 million (not 44.5 or 44.7!), and my SWAG is that (assuming realistic product proliferation) Apple will account for 30 million of those.

The iPad in 3 quarters outsold the 10.8 million 2010 sales estimated by IDC for all ereaders, and the 14.7 million projected for 2011. The iPad has a unit sales volume 3.3x that of the Amazon Kindle (perhaps 4.5m in 2010) and has an ASP of 3x as much.

If the tablet market does grow to 45 million in 2011, then ereaders will be consigned to a relatively small role in mobile device, as tablets are increasingly used for reading magazines and perhaps even for reading books. The black & white E Ink is a transition technology, to be replaced by the color E Ink, Qualcomm’s Mirasol, or other technologies.

So 2011 seems like a good time for techies to buy a cheap web-enabled tablet to understand the form factor, its use case and limitations. It will also mean that the countless Android vendors fighting for #2 need to consolidate their gains.

Samsung sees itself the favorite, and as their cellphone growth threatens #1 Nokia, they would be risky to bet against. I think B&N (with their nookColor) has the enviable position in the US, but they need to license or distribute the technology worldwide to gain scale economies.

Commoditization is hell

Tonight I parked my car, walked by the empty shell where our neighborhood Blockbuster used to be, and went into our local Safeway. My first stop was the Blockbuster kiosk inside Safeway, to rent a recent Harry Potter movie prized by our eldest.

Even before the store closed, we only rented about one video/year there. Instead, we have been renting from the two local kiosks — DVDPlay in Safeway and RedBox in Lucky. Unlike two years ago, tonight I could check the availability of movies at each kiosk before I left the house.

I suppose this is a small victory for Blockbuster, since this kiosk is now a “Blockbuster Express” kiosk since NCR bought DVDPlay 13 months ago and entered a joint venture with Blockbuster.

But I used to pay the local Blockbuster franchise $3-5 per rental, whereas the kiosk grosses $1 per rental. Hollywood is still garnering the largest share of the COGS, while meanwhile Blockbuster gets a small part of the money left after Hollywood, NCR and the grocery store get paid. (The exact financial terms between NCR-Blockbuster don’t appear in either company’s 10-K).

So realtime rental of physical DVDs remains brutally commoditized while some predict it will only get worse as the two major players duke it out.

Meanwhile, DVD downloads appear to be dominated by Netflix (just as Apple has two-thirds of the audio downloads). Much as the studios would like to commoditize all distribution, they have thus far failed to do so for digital downloads — the only channel that is likely to matter a decade from now.

Microsoft vs. Open Kinect

This week’s dead tree Business Week has an extensive article on Microsoft’s war against the hackers trying to repurpose its pathbreaking Kinect hardware for other purposes.

It turns out Microsoft’s cool new hardware is the ideal platform for all sorts of robotics and machine vision applications, at consumer off-the-shelf prices. Primesense, original Kinect manufacturer, is planning on supporting developers with a special developer version.

It goes without saying that firms need to leverage their extremely loyal customers and that it’s risky (if not stupid) to tell them they can’t use a product the way they want.

Reporter Ashlee Vance quotes Utah’s most famous and perhaps America’s most oft-quoted) open source executive, my friend Matt:

Microsoft has succeeded despite themselves in creating something really cool," says Matt Asay, a prominent open-source blogger and executive at software startup Strobe. Yet a number of critics say the relationship between Microsoft and Kinect-loving geeks is already strained, and that Microsoft's early reactions to their playful tinkering suggest it could squander a once-in-a-generation opportunity. "Here was a chance to throw themselves deep into the bowels of the open-source hippy movement," Asay says. "They are kind of trying to do it, but they don't want to touch anyone in the mosh pit."

Adds another well-known expert (and friend):

"Companies should make it easy for people to hack," says Karim Lakhani, an assistant professor at Harvard Business School who studies open-source projects. "Why wouldn't you want people going crazy with your products?"

Business Week does a good job summarizing the situation and Matt and Karim why such hacks should be made an asset rather than a distraction or a liability.

The fundamental problem is Microsoft’s business model: they brought the hardware to the market cheap assuming they’d make all their profits off of games (which generate either direct or royalty revenue). They thought they were making a peripheral that made the Xbox 360 platform more attractive — but instead they were creating a entirely new platform.

It reinforces a point I emphasize with my technology strategy students: cross-subsidies are always dangerous, because someone will find a way to arbitrage the subsidy. If you give away razors and make it up by gouging people for razor blades, then someone will sell cheap blades that don’t need a subsidy.

One might argue that Microsoft couldn’t such hacking coming, but that wouldn’t compute. Almost nine years ago, hackers figured out how to take (the heavily subsidized) original Xbox and turn it into a cheap Linux machine.

Microsoft is missing a significant market opportunity by not being open to third-party enhancement of the Kinect hardware. Although the volume will not be as big as for a hit game — as predicted by Karim and his research — third-parties will identify markets and solutions that Microsoft never anticipated.

Over the past few years, Nokia faced a similar conundrum as university scientists hacked N-series phones (such as the N95) to use as a mobile sensing platform. At least a few people in Nokia Research (back when there was a Nokia Research) understood this and were working on even better unlocked hardware for this purpose.

It’s not too late for Microsoft to turn things around. The Kinect COGS will continue to fall. Instead of more aggressively pricing the hardware, it can use the savings to increase the gross margin, reduce the subsidy and make the Kinect a self-supporting stand-alone device.

In the short run, Microsoft can also (quite inexpensively) support a university or hacker conference on other applications of Kinect. MIT, Stanford, Carnegie Mellon or even its hometown UW would be glad to take the lead.

iPhone rejoicing

A reading from the 27th chapter of the Book of Jobs:

1. And the waters parted and the heavens opened and a heavenly chorus sang Hallelujah.

2. King Jobs looked out upon the Verizon, whose people had found favor in his sight.

3. And there was great rejoicing among the people, for their longstanding prayers had finally been answered.

4. However, in the village of Saint Anthony, there was great wailing and gnashing of teeth, as the Cingularians realized that their supremacy across the land had at last come to an end.

5. All this came to pass in the 15th year of the second reign of King Jobs.

Delusional tablet proliferation

As part of the Year of the Tablet at the Tablet Electronics Show (TES) in Las Vegas this week, the chairman of AsusTek has unveiled a family of Eee Pad tablets (based on Android), hoping to leverage the brand recognition from its Eee PC family of netbooks.

According to the AP, the products were introduced by AsusTek chairmain Jonney Shih. The two main models are tablets that run Android 3.0 (aka Honeycomb):

• Transformer, 10.1" screen for $500-700
• Slider: 7" screen for $400-700.

In other words, they take a netbook, delete the keyboard and OS royalty, and double the price. I don't get it. Do they now see themselves as a technology or marketing powerhouse (apparently a common delusion among Taiwanese commodity producers.)

Suppose I wanted a 10" tablet. What other options might I consider? How about one with the most apps, the best PC integration, best browser, best dealer network and the best brand? So what kind of premium would I pay for an iPad? Perhaps none, since the iPad start at $500 — same as the Asus Transformer.

Perhaps I find that too expensive, and instead choose the 7" Asus Slider at only $400. Of course, there’s a NookColor (Android tablet) at $250 with a vertically integrated nationwide dealer network and a dedicated content store.

If this is the pricing of the promised wave of Android tablets, no wonder analysts predict Apple will retain 2/3 of the market.

Motorola splitting its way to greatness

The breakup of Motorola became effective Tuesday: Motorola Mobility (MMI) gets cellular handsets and settop boxes, Nokia Siemens gets the cellular infrastructure business, Motorola Solutions (MSI) gets government & industrial radio clients, and Sanjay Jha gets to be COO.

The split brought a nice day one stock bounce of 9.5% for MMI and 6.6% for MSI.

On one level, it marks an ignominious end for the company that invented the handheld cellphone. It also clears the way for one or both of the companies to be gobbled up by bigger companies — no small concern given that Carl Icahn owns $2b worth of shares and (as always) wants to maximize his own short-term return rather than build a long-term winner.

It didn’t have to come to this: Motorola was the world leader in handset sales as late as 1997 and second until 2007, when it still led the US cellphone market. However, it was late to shift to digital and late to shift to software. (By comparison, the infrastructure business was never able to master the complexity of telephone switching and became uncompetitive once mobile radio technology diffused throughout the industry.)

Its handset business has been losing money for many years. As announced in March 2008, the handset spinoff was an attempt by CEO Greg Brown to dump the losing handset business after being unable to sell it. Even with its recent improvement, its survival is by no means certain.

Motorola co-CEO (now MMI founding CEO) Sanjay Jha deserves full credit for the turnaround over the past 30 months, in large part through his bold decision to bet the farm on Android. It’s too soon the say whether the turnaround is permanent, as MMI faces brutal competition in all the major categories where it competes: US market, smartphone market, Android handset market and even for Verizon’s loyalty (with the iPhone LTE due Real Soon Now.)

Still, it’s a good move for Jha, who as COO of Qualcomm was going to grow old waiting two or three decades for Paul Jacobs to retire. Very few Qualcomm execs seem to want to leave the mother ship — whether it’s because of the weather, lifestyle, or gross margins, I don’t know.

His gamble to move back east has certainly paid off. Even if MMI is unable to pull it off, he will certainly be snapped up by another tech company. Exhibit A: Eric Schmidt, who jumped from the sinking Sun Microsystems ship to become CEO of Novell and — without fixing its intractable problems — got named CEO of Google.

One unresolved question: will MMI keep settop boxes? The former General Instruments (with major operations in San Diego thanks to the Linkabit Videocipher spinout) accounts for about one-third of its revenue, but there are few obvious synergies. Now that Cisco owns its main competitor, Scientific Atlanta, there’s no obvious exit strategy, but I imagine finding a home for the STB business will be one of Jha’s 2011 priorities.

Cross posted to San Diego Telecom Industry.

Google as the new AT&T?

As an economic historian, I know that my colleagues often seek to interpret new firms in terms of historical analogies. With their love of precedent, it appears that lawyers do too — most recently in the case of Google.

I know that during the Microsoft antitrust trials of the 1990s, many analogies were made to the breakup of Standard Oil almost a century earlier — one of the main reasons the US has “antitrust” laws in the first place like the Sherman Act (1890) and the Clayton Act (1914). As Google increasingly faces antitrust scrutiny, it’s also being compared to Microsoft and earlier monopolists — something that interests both economists and lawyers who study antitrust.

Now Tim Wu, a professor at Columbia Law School, has released a book entitled The Master Switch: The Rise and Fall of Information Empires. I haven’t had a chance to read the book, but I caught his explanation in an interview just before Christmas on California’s socialist progressive radio network, Pacifica.

Wu argues that Google is the next AT&T, wanting to be a complete, integrated communications utility. Meanwhile, his analogy is that Apple is like an old-time (pre-war) movie studio, vertically integrated soup-to-nuts. These are interesting analogies, but both seem to be a bit of stretch.

From 1920-1970, AT&T was the US telecommunications industry, dwarfing the combined size of all the remaining telecom companies (whether GTE, ITT or Motorola.) Google dominates search, and makes some other cool technologies, but it’s hard to imagine away the new (faux) AT&T, Verizon — or Apple, Cisco, Microsoft, Nokia, or a half dozen cable companies.

Similarly, Apple has been delivering an integrated experience for more than 30 years, but the nature — and economic impacts — of integration are substantially different for software and systems than for distributing movies. Also, Apple doesn’t create the content — and deliver it on an exclusive basis — but redistributes 3rd party entertainment and applications generally available on multiple platforms.

Still, both analogies seem more plausible than the analogy of another law school professor — my friend Mike Madison of Pitt — and his post entitled “Google as Switzerland.”

Yes, Google would like to be seen as a neutral party, and to avoid being in the middle of the wrenching fights over copyright, fair use, and 21st century information business models. But given its role in shaping our expectations of free content — and the billions it captures from selling ads around that content — it seems as though its claims of neutrality are about as plausible as (say) President Roosevelt’s in 1941.

To me, Google does seem like Switzerland — but more like the Switzerland that once profited by selling arms to all sides of military conflicts. First with smartphones, and now with tablets, Google’s Android is enabling entry (as well as mobile connectivity and application availability) by four of the five traditional handset leaders and more than a dozen minor players.

What do these analogies hold? Once upon a time, AT&T’s scope was unrivaled, but its competitors used the legislative and judicial branches to hobble it and eventual bring its breakup. The expensive studio system died off when the studios could no longer capture all the profits from their investments. And while Switzerland was once an industrial powerhouse — and still plays a major role in pharma and finance — it was eventually eclipsed by the economic growth of its larger rivals, particularly Germany.