Nothing beats a platform monopoly

Since the birth of broadband, net neutrality’s cheerleaders have feared that service providers might begin to act as the internet’s “gatekeepers,” …The real distortions come from massive “platform monopolies” like Google, Facebook and Amazon, whose proprietary algorithms decide what users see online.

The supposed purpose of “net neutrality” is to stop any internet company from getting a leg up over others. But that’s exactly what happens when Google’s search results prioritize its own services—and profits—over competitors’. …If Google’s favoring its own products while pushing potential competitors down its rankings doesn’t create “fast” and “slow” lanes, what on earth does?

Similarly, avowed net-neutrality supporter Amazon was granted a patent in May for “Physical Store Online Shopping Control,” a system to block shoppers in brick-and-mortar stores from using Wi-Fi to view competitors’ prices. Isn’t “no blocking” the heart of net neutrality? Facebook, meanwhile, has virtually abandoned chronology in its News Feed in favor of picking and choosing what users see—and what they don’t—based on what the company has learned about them.

The costs of such abuses from the platform monopolies are obvious and many. Newspapers have nearly been “prioritized” out of existence by Google’s shameless appropriation of their work: Why click through and read a whole article when Google News will pluck out the most important bits and show them to you free—alongside its own ads, of course. … Last year, the FCC chairman tried and failed to force TV companies to make their feeds available on set-top devices made by—wait for it—Google, Apple and Amazon.

The internet giants behind the Day of Action can now track users’ physical location 24 hours a day, learning where they live and work, by logging where their phones are at different times of day or the Wi-Fi networks they pass. If two phones sit side by side overnight, advertisers knows what that means—and appropriately “targeted” pitches are sure to follow.

From Ev Ehrlich, “‘Neutrality’ for Thee, but Not for Google, Facebook and Amazon,” Wall Street Journal, July 21, 2017.

Who will disrupt Google and Facebook?

Driving home from a breakfast meeting this morning, I got to wondering who is going to disrupt Google — and how soon.

Those of us who teach strategy know how all about examples of new entrants commoditizing and destroying the revenue models and profit sanctuaries of long-stable, long-established businesses. (The term “disruptive innovation” seems most convenient here, despite the recent controversy over the original evidence of same). Here are a few examples.

• Craigslist and various Internet portals (such as Google and Yahoo) destroyed newspapers — aided by the latter’s poor business models, some unfortunately inaccurate assumptions about the supply (and thus price) of Internet advertising and key tactical errors along the way.
• Two entrepreneurs created GrandCentral, a (temporarily) free telephone answering and forwarding service, and in 2007 sold it to Google (where it is now Google Voice). It now has voicemail transcripts and other improvements but is still free. Thousands of small companies and nonprofits (including my own) use it in lieu of an answering service.
• I learned how to use Google Forms from my friend Mako Hill (and his need to run the OUI conference with limited cash and volunteer resources). Now I use it for most things that other people use SurveyMonkey for.

So the question I mulled over was, who will disrupt Google? Facebook would like to take business away from Google, but it’s not through cost reduction or elimination of revenues. Rather, Facebook imagines that its socially embedded ads will be more valuable than Google’s search context-specific ads.

Instead, I find Facebook ads creepy and sometimes invasive of my privacy, particularly when Amazon ads show up for a book that I looked at (but ruled out buying) five minutes earlier. (Apparent Amazon is not alone). I am appalled at what would happen if I had looked at a socially undesirable product on Amazon (sex toys, a book on bombing government buildings) — even though I know that anonymous browsing without cookies would allow me to ask a question (if not make a purchase) without leaving digital breadcrumbs.

Then when I got home, I saw this wonderful article by Andrew Orlowski of The Register (who I mainly know from his insightful analysis of mobile phone platform wars). One passage (emphasis mine) touched on the same theme:

'Dear Daddy...' Max Zuckerberg’s Letter back to her Father
What do you mean, I can't get off Facebook?

2 Dec 2015 at 13:02, As told to Andrew Orlowski

Comment Yesterday Mark Zuckberg accompanied the birth of his first child, a daughter Max, with a long open letter.

Thanks to the miracle of modern technology, we've found what Max might write back, and we're sharing it with you:

Dear Daddy

Thank you for the letter that your PR and public policy team wrote to mark my Birth, and sent to every news outlet in the World. Most Daddies wouldn’t do this. Heck, most Daddies don’t even have PR and public policy team, and those that do wouldn’t use to leverage a private family event!

That’s why you Daddy, are so special.

You write: "We want you to grow up in a world better than ours today."

Well, duh!

If I discovered that my well-educated billionaire parents wanted me to grow up in a world that’s worse than ours today, I’d already have crawled my way to a phone booth and dialled 911 to alert the authorities.

That goes for "a world without suffering from disease” too. Wow. Where do you get this stuff, Daddy? I heard more original ideas when I was a single cell blastula!

You also write:

"Technological progress in every field means your life should be dramatically better than ours today."

I’d like to think so too, Daddy, but there’s this thing that’s bothering me.

It's called Facebook.

And not just Facebook, it’s the way Silicon Valley companies like yours pile up huge wealth by destroying value in every other part of the economy, as if technological progress were a zero sum game. It’s the way you strip-mine individuals so they have no ability to be autonomous economic agents, owning and trading the stuff we make, so all we have to live on is some feudal digital plantation - and we have to be grateful for it. It's the way some Valley firms place themselves above the law and try to block the work of elected officials who want to defend human rights.

Not you of course, Daddy. Just some of your friends.

I mean, come on. There's a lot to teach children in this modern world I've just been born into. But one thing we've got to learn is that just because you can do something, it's not necessarily morally acceptable to do it. Who's going to teach me that in Silicon Valley?

And Daddy. Connecting people all over the world through an internet website is very cool idea indeed. But it's not that cool or original. It’s as if the guy who invented the bottle-opener wrote a plan to become Emperor of the World. Like, "Remind me who you are again?"

I think that’s pretty weird already. And I’m only one day old!

Well if there’s any of the economy left by the time I graduate, perhaps my generation will be a bit less selfish than yours, Daddy, and we can teach you about it.
…
Well, I’m kinda tired writing all that. It’s time for nap. Just remember when you’re burping me, do it over your shoulder, that way I won’t puke all down your front.

Your loving baby daughter,

Max

In the Google (and now Facebook) case, I thought about Microsoft. They were a one trick pony that was handed a monopoly in operating systems (and used that to build another one in business productivity apps) that they exploited to the maximum degree possible. But a) they lacked the ability to create new compelling products and business models and b) everybody distrusted them and thus were wary of providing them new monopolies, no matter how good their technology.

So at some point, the shoe will be on the other foot: what happens when Google and Facebook have their profit sanctuaries destroyed? Google — now Alphabet — appears headed towards becoming a diversified technology conglomerate. It has worked (so far) for Hitachi and Samsung, but not for HP or Sony. Thus far, it appears that Apple and IBM have been the masters of re-invention: will the new kings of Silicon Valley be able to replicate such feats?

Retailers' Hobson's choice: crushed by Amazon or exploited by Google

It’s no secret that during the e-commerce era, the local (and even chain) retailer has lost its hold over local customers — particularly in the face of an ever-expanding variety of online merchandise, first from Amazon and later from the clicks-and-mortar chain retailers such as Target and Wal-Mart.

Meanwhile, the tyranny of the local newspaper has been replaced by the tyranny of the search engines (i.e. Google) in controlling the ability of retailers to get their message to potential customers.

Now the Wall Street Journal reports that retailers are facing a Hobson’s choice of being exploited by Google to avoid being crushed by Amazon. (Merriam-Webster defines a Hobson‘s choice as “the necessity of accepting one of two or more equally objectionable alternatives”).

The report says that to capture more product search — advertising and purchases — Google is testing a “buy” button for its search results to reduce the number of searches that begin on Amazon:

In the third quarter, 39% of U.S. online shoppers began researching their purchases on Amazon and only 11% started on search engines like Google, according to Forrester Research . That’s a reversal from 2009, when 24% started on search engines and 18% on Amazon.
…
“Amazon is increasingly running away with online retail in North America, which poses a huge problem for Google,” said Jeremy Levine, an e-commerce investor at Bessemer Venture Partners. “Google has to get in front of this and create a reasonable alternative.”

That Google chose to fight back is not surprising, nor is it surprising that it did so without consulting retailers. Given its data-driven culture, it’s also not surprising that it ran a live experiment. However, the nature of the experiment alarmed some retailers:

Retailers’ concerns about Google’s initiative were heightened in November when digital-marketing agency RKG spotted an unannounced Google test. Google users searching for “anthropologie,” the women’s clothing retailer owned by Urban Outfitters Inc., were also shown a link to a Google Shopping page with dozens of the retailer’s product ads. Anthropologie didn’t give its permission, according to a person familiar with the matter.

Or as search engine guru Larry Kim explained:

Is Google Shopping Becoming A Competitor To Retailers?

Based on this test, it would appear that's a real possibility.

Essentially, this would cut out the middleman and drive searchers to make their purchasing decisions within Google Shopping. It adds competition to what began as a branded search – rather than being presented with David Yurman rings for sale by David Yurman, the searcher sees David Yurman rings for sale at Nordstrom, Bloomingdale's and other retail sites.

If Google adopts this test as a permanent feature, it has the potential to drive up CPC's for branded search terms, as people searching for a particular type of product from a specific brand will now be presented with competitor options, as well.

Further, users can do comparison shopping right within Google Shopping, without having to go the retailers’ websites, whether they were searching for a specific retailer/brand or not. It’s another example of Google stealing traffic from your website, like they do with Knowledge Graph and vertical results like weather and flight comparisons.

This could be a welcome change for searchers; this is why Google runs all these tests. But advertisers may be annoyed to learn that searches on their brand name are being used to drive traffic to Google Shopping. … As for advertisers, I’m pretty sure they won't appreciate Google creating competition for them where it didn't exist before.

In this regard, Google is seeking revenue growth by taking traffic from those who created the content it indexed. It doesn’t have to integrate to generate the content or be able to fulfill orders, but instead can control the eyeballs (selling more ads and having more stickiness) while commoditizing retailers.

So in a fight for Total World Domination (or at least North American retail domination), Google will take away visibility and revenue from its most profitable customers.

Why does Google do this? Because it can. It’s not quite a monopoly, but it’s almost without viable competition: in the US, it has a 3:1 market share lead over its nearest competitor on PCs, and a 5:1 lead in mobile. In Europe, it has a nearly 10:1 lead, which is prompting calls for competition authorities to end its vertical integration.

The web brings a scale to retailing that never existing in the turn of the century (or Calvin Coolidge) Main Street USA era. Local retailers (and their commercial landlords) will continue to pay the price.

Google Show Greed Trumps Values Every Day

Google once promised that is mission was “to organize the world’s information”. Nominally that remains its mission today.

On the 10th anniversary of its IPO, in this morning's WSJ, Rolfe Winkler shows how that all changed:

Just before Google Inc. went public 10 years ago, co-founder Larry Page said he wanted to get the search engine's users "out of Google and to the right place as fast as possible."

Today, Mr. Page's Google often is doing the opposite: Providing as much information as possible to keep users in Google's virtual universe.

At first, leveraging its dominant share in search, Google was content to have people linger longer (ala Yahoo or later Facebook) to sell them to more advertisers. Now they want to monetize that customer hold directly by doing transactions and taking a piece of the action. The dead tree (and online edition) shows the before and after — Google the indexer of the Internet vs. Google the horizontally diversified Internet portal:

In other words, Google once created an ecosystem (including APIs and a two-sided advertising market) and wanted to make its ecosystem partners successful. Now, in its relentless pursuit of growth, it is crowding aside its onetime partners and trying to take more money from its customers.

This is exactly what DEC, Apple, Microsoft, Oracle and countless other tech companies have done over the decades. Joining an ecosystem is a viable startup business until the ecosystem sponsor wants to take that business away. The book Keystone Advantage refers to this as an ecosystem “dominator.” Among tech companies, only IBM seems to be a reliable partner for win-win alliances, in part because its integration services business model allows it to make money with almost any sort of component.

Of course, this was inevitable. Companies like Google want to grow, because it supports the stock price and puts more money into the hands of shareholders, employees and executives. Since Larry Page and Sergey Brin are now worth $32 billion apiece, I’m guessing it’s less about the money and more about the control, the ego, the success of making the world’s most dominant influential company of all time.

As we teach in strategy, there’s only two ways to grow: reach more customers or make more money out of your existing customers. If Google is serving almost everyone on the Internet, it either has to connect more people to the Internet (who will be less profitable than their existing customers) or sell more stuff to those already locked into Google. Obviously (with its $50 billion in cash horde and 60+% gross margins) it’s doing all of these things.

Unfortunately, a dominant vertically integrated (and horizontally diversified) monoculture is bad for the economy, bad for consumers and bad for society. It takes transactions that should be happening in the market and internalizes them into an internal hierarchy. Europe has been trying to nibble at the edges of Google’s efforts at Total World Domination for years, but had little impact. The U.S. seems disinterested, because the GOP believes in free markets and the Democrats receive millions in campaign donations from Google's wealth.

Normally we can count on the curse of success to eventually kick in: big companies either become complacent, bureaucratic or otherwise lose their way (cf. GM, Microsoft). The Google founders seem determined to make sure this doesn’t happen during their lifetime, which could be 30 years (with a normal retirement) or 50 (if they last like Warren Buffett). Since I’m older than both men, I may not live to see the end game — which is a depressing thought.

Why some fear Google -- and others should, too

Excerpts from a 4,000 word letter by the CEO of a leading German publisher to the company that once promised “don’t be evil”:

An open letter to Eric Schmidt
Why we fear Google
17.04.2014, von MATHIAS DÖPFNER
Frankfurter Allgemeine
Dear Eric Schmidt,

In your text “Die Chancen des Wachstums” (English Version: “A Chance for Growth”) in the Frankfurter Allgemeine Zeitung, you reply to an article which this newspaper had published a few days earlier under the title “Angst for Google” (“Fear of Google”). You repeatedly mention the Axel Springer publishing house. In the spirit of transparency I would like to reply with an open letter to highlight a couple of things from our point of view.
…

Google doesn’t need us. But we need Google…
Google’s employees are always extremely friendly to us and to other publishing houses, but we are not communicating with each other on equal terms. How could we? Google doesn’t need us. But we need Google. And we are also worlds apart economically. At fourteen billion dollars, Google’s annual profit is about twenty times that of Axel Springer. The one generates more profit per quarter than the revenues of the other in a whole year. Our business relationship is that of the Goliath of Google to the David of Axel Springer. When Google changed an algorithm, one of our subsidiaries lost 70 percent of its traffic within a few days. The fact that this subsidiary is a competitor of Google’s is certainly a coincidence.

Not only economic, but also political

We are afraid of Google. I must state this very clearly and frankly, because few of my colleagues dare do so publicly. And as the biggest among the small, perhaps it is also up to us to be the first to speak out in this debate. You wrote it yourself in your book: “We believe that modern technology platforms, such as Google, Facebook, Amazon and Apple, are even more powerful than most people realize (...), and what gives them power is their ability to grow – specifically, their speed to scale. Almost nothing, short of a biological virus, can scale as quickly, efficiently or aggressively as these technology platforms and this makes the people who build, control, and use them powerful too.”

The discussion about Google’s power is therefore not a conspiracy theory propagated by old-school diehards. You yourself speak of the new power of the creators, owners, and users. In the long term I’m not so sure about the users. Power is soon followed by powerlessness. And this is precisely the reason why we now need to have this discussion in the interests of the long-term integrity of the digital economy’s ecosystem. This applies to competition, not only economic, but also political. It concerns our values, our understanding of the nature of humanity, our worldwide social order and, from our own perspective, the future of Europe.

The greatest opportunity in the last few decades

As the situation stands, your company will play a leading role in the various areas of our professional and private lives – in the house, in the car, in healthcare, in robotronics. This is a huge opportunity and a no less serious threat. I am afraid that it is simply not enough to state, as you do, that you want to make the world a “better place.”
…
You say in your article that those who criticize Google are “ultimately criticizing the Internet as such and the opportunity for everyone to be able to access information from wherever they happen to be.” The opposite is true. Those who criticize Google are not criticizing the Internet. Those who are interested in having an intact Internet – these are the ones who need to criticize Google.
…
Google is to the Internet what the Deutsche Post was to mail delivery or Deutsche Telekom to telephone calls. In those days there were national state monopolies. Today there is a global network monopoly. This is why it is of paramount importance that there be transparent and fair criteria for Google’s search results.

However, these fair criteria are not in place. Google lists its own products, from e-commerce to pages from its own Google+ network, higher than those of its competitors, even if these are sometimes of less value for consumers and should not be displayed in accordance with the Google algorithm. It is not even clearly pointed out to the user that these search results are the result of self-advertising. Even when a Google service has fewer visitors than that of a competitor, it appears higher up the page until it eventually also receives more visitors. This is called the abuse of a market-dominating position. And everyone expected the European antitrust authorities to prohibit this practice. It does not look like it will.
…
Is it really smart to wait?
Historically, monopolies have never survived in the long term. Either they have failed as a result of their complacency, which breeds its own success, or they have been weakened by competition – both unlikely scenarios in Google’s case. Or they have been restricted by political initiatives. IBM and Microsoft are the most recent examples.

Another way would be voluntary self-restraint on the part of the winner. Is it really smart to wait until the first serious politician demands the breakup of Google? Or even worse – until the people refuse to follow? While they still can? We most definitely no longer can.

Sincerely Yours
Mathias Döpfner

Via John Paczkowski at re/code

In the real world, Android is a proprietary platform

Since Android was first released, many of us have wondered how open it really is. Last week, we learned more about Google’s tight control over Android through documents released as part of an European antitrust investigation.

The story was first reported by the Wall Street Journal, based on an analysis by Harvard professor Ben Edelman. (The WSJ said that Google declined to comment). The meat of the revelation were copies of the 2011-2012 “Mobile Application Distribution Agreement” (MADA) that was signed by Android licensees Samsung and HTC. The agreements were exhibits in the Google-Oracle (née Sun Microsystems) Java copyright lawsuit in the Federal District of Northern California.

Ties That Bind

Rolfe Winkler of the WSJ summarized the (MADA) agreements as follows:

The Samsung and HTC agreements specify a dozen Google applications that must be "preinstalled" on the devices, that Google Search be set as the default search provider, and that Search and the Play Store appear "immediately adjacent" to the home screen, while other Google apps appear no more than one screen swipe away.

The terms put rival mobile apps, like AOL Inc.'s MapQuest and Microsoft Corp.'s Bing search, at a disadvantage on most Android devices. Mr. Edelman, who is a paid consultant for Microsoft, said the terms "help Google expand into areas where competition could otherwise occur."
…
Google has successfully promoted its own apps on Android. Four of the top 10 most-used apps on Android smartphones in the U.S. during December were Google's, according to comScore. On Apple's iPhone, only one Google app—YouTube—was among the top 10.

Calling Edelman a Microsoft consultant seems like a red herring. More relevant is that he embarrassed Google by noting that it tracked user browsing even when users disabled it. Edelman seems an equal opportunity Internet activist, having spent his entire adult life at Harvard (earning an AB, AM, JD, and PhD in econ before becoming an assistant and associate professor at Harvard Business School).

In his own analysis, Edelman shows how Google’s activities constitute tying:

If a phone manufacturer wants to offer desired Google functions without close substitutes, the MADA provides that the manufacturer must install all other Google apps that Google specifies, including the defaults and placements that Google specifies. These requirements are properly understood as a tie: A manufacturer may want YouTube only, but Google makes the manufacturer accept Google Search, Google Maps, Google Network Location Provider, and more. Then a vendor with offerings only in some sectors—perhaps only a maps tool, but no video service—cannot replace Google's full suite of services.

I have repeatedly flagged Google using its various popular and dominant services to compel use of other services. For example, in 2009-2010, to obtain image advertisements in AdWords campaigns, an advertiser had to join Google Affiliate Network. Since the rollout of Google+, a publisher seeking top algorithmic search traffic de facto must participate in Google's social network. In this light, numerous Google practices entail important elements of tying:

If a wants	Then it must accept
If a consumer wants to use Google Search	Google Finance, Images, Maps, News, Products, Shopping, YouTube, and more
If a mobile carrier wants to preinstall YouTube for Android	Google Search, Google Maps (even if a competitor is willing to pay to be default)
If an advertiser wants to advertise on any AdWords Search Network Partner	All AdWords Search Network sites (in whatever proportion Google specifies)
If an advertiser wants to advertise on Google Search as viewed on computers	Tablet placements and, with limited restrictions, smartphone placements
If an advertiser wants image ads	Google Affiliate Network (historic)
If an advertiser wants a logo in search ads	Google Checkout (historic)
If a video producer wants preferred video indexing	YouTube hosting
If a web site publisher wants preferred search indexing	Google Plus participation

Not all tying is illegal. But tying by a dominant firm is legally suspect — even more so in Europe, where the competition policies are more aggressive (especially for US firms like Google).

Technically Open, Commercially Not

From a practical standpoint, phone makers have no choice but to comply with Google’s terms (with the exception of China’s domestic market, where Google’s services are blocked). As OSS IP maven Florian Mueller wrote:

Technically you can take the free and open parts of Android (in terms of the amount of code, that's probably the vast majority, though the share of closed, tightly-controlled components appears to be on the rise) and build a device without signing any individual license agreement with Google, and some have indeed done so. If that is so, why did Samsung and HTC sign those agreements that have now come to light? For commercial reasons.

If you want your Android device to sell, you normally want to be able to call it an Android device. To do that, you need a trademark license from Google. Open source licenses cover software copyright, they may come with patent provisions, but licenses like the GPL or ASL (Apache) don't involve trademarks.

The trademark -- the little green robot, for example -- is commercially key. In order to get it, you must meet the compatibility criteria Google defines and enforces, which are mostly about protecting Google's business interests: the apps linked to its services must be included. And those apps are subject to closed-source, commercial licensing terms. That's what the MADA, the document Samsung and HTC and many others signed, is about.

Even if you decided that the trademark isn't important to you, you would want at least some of the apps subject to the MADA. What's a mobile operating system nowadays without an app store? Or without a maps/navigation component? Google gives OEMs an all-or-nothing choice: you accept their terms all the way, or you don't get any of those commercially important components. And if you take them, then you must ensure that the users of your devices will find Google services as default choices for everything: search, mail, maps/navigation, etc.

This “free” software comes at a price. Even if Google doesn’t charge royalties to use its applications, the London Guardian estimated last month that it costs $40k-$75k to test a new handset for compliance with Google’s standards and thus be allowed to ship Google’s applications.

Google Isn't Open About Not Being Open

Most troubling for me has been — since the beginning of Android — the gap between Google’s rhetoric of openness and the reality; for example, see “Open source without open governance” (June 2008), “Perhaps someday Android will be open” (July 2008), “Sharing in faux openness” (October 2009), “Google’s half-full glass of openness (January 2010), “Andy wants you to buy his openness (June 2010) “Semi-open Android getting more closed” (October 2013).

While these agreements have been in place for at least three years, Edelman notes that Motorola redacted the most important provisions of the MADA when it disclosed excerpts in a 2011 SEC filing. Google’s lack of transparency about its non-openness helps it be more successfully non-open:

MADA secrecy advances Google's strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response. If users, app developers, and the concerned public knew about MADA restrictions, they would criticize the tension between the restrictions and Google's promise that Android is “open” and “open source.” Moreover, if MADA restrictions were widely known, regulators would be more likely to reject Google's arguments that Android's "openness" should reduce or eliminate regulatory scrutiny of Google's mobile practices. In contrast, by keeping the restrictions secret, Google avoids such scrutiny and is better able to continue to advance its strategic interests through tying, compulsory installation, and defaults.

Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google's restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.

With some irony, the WSJ article quoted Google’s former CEO:

"One of the greatest benefits of Android is that it fosters competition at every level of the mobile market—including among application developers," Google Executive Chairman Eric Schmidt wrote to then-U.S. Senator Herb Kohl in 2011.

Peeling Back the Layers of Openwashing

While the most specific and conclusive, this latest revelation is not the only evidence that Android is more openwashing than open source.

For example, in October Ron Amadeo of Ars Technica listed all the cases where “open source” Android once came with a key application available in open source, but then Google orphaned the open source app when it brought out a fully-featured closed-source replacement. This includes the Search, Music, Calendar, Keyboard, Camera and Messaging apps.

At the same time, Google (with great success) sought to convince app developers to use the Google Play APIs rather than the official Android APIs — thus making these apps incompatible with devices that use only the open source part of Android (e.g. Amazon’s Kindle). If you want to use apps from the Google app store, you have to use the Google APIs.

Finally, there’s the matter of the Open Handset Alliance, the organization nominally leading Android development. Amadeo makes clear that OHA is more like the Microsoft Developer Network than the Eclipse Foundation (emphasis in original):

While it might not be an official requirement, being granted a Google apps license will go a whole lot easier if you join the Open Handset Alliance. The OHA is a group of companies committed to Android—Google's Android—and members are contractually prohibited from building non-Google approved devices. That's right, joining the OHA requires a company to sign its life away and promise to not build a device that runs a competing Android fork.

Google: Partly Open and Opening Parts

In the early 2000s, open source was a paradox. When I began researching my second open source article (which I used as a job talk in December 2001 and was published in 2003), it was not clear how firms could make money from something nominally open. Based on a study of Apple, IBM and Sun, I concluded that firms made money off of openness with strategies that were open in one of two ways: they opened parts (leaving other parts close) or they were partly open (granting some rights, but not enough to enable competitors).

Google is clearly doing both. Amadeo emphasizes that with Android, Google is only opening parts — leaving key components under tight control. Meanwhile, the latest news points to Google being only partly open: rights to use the “open source” (actually, a mixed-source) system depend on complying with a series of Google restrictions.

In 2011, mobile analyst Liz Laffan studied the openness of eight mobile-related open source communities. Building on a 2008 study I did with Siobhan O'Mahony, she developed a 13-factor openness score for firm controlled open source communities. In her report (summarized in a 2012 journal article) Laffan assigned scores from 0-100% open. Android was lowest at 23%, and in fact the only project less than 50%. At the other extreme, Linux was 71% and Eclipse (designed to be open from the start) was 84%.

Conclusion: Real World Android is a Proprietary Platform

In the 1980s and 1990s, Microsoft won commercial success by widely licensing its PC operating system to all comers. However, after the initial licenses (with its launch customer IBM), Microsoft largely dictated the terms of these licenses.

When people buy an Android phone, they are not buying the Android Open Source Project but (as Amadeo makes clear) the Google Play Platform. This platform — call it Real World Android — has the following characteristics

• Like Apple’s OS X (or IBM’s WebKit), it combines open source and proprietary elements.
• Like Windows, it is licensed to a wide range of hardware manufacturers.
• Like both OS X and Windows, much of the value comes from bundling a wide range of proprietary, closed-source applications

In short, Real World Android is a proprietary platform: proprietary in that it is a mixture of open source and proprietary elements, but the complete platform (including application functionality and access to the Android app ecosystem) requires licensing proprietary technologies under a restrictive proprietary contract. (For a true open source system, the open source license would be enough).

A few market experiments (notably Kindle and the Chinese market) have been made using the Android open source project (which Amadeo dubs AOSP). For the remainder, as Florian notes, commercial success requires agreeing to Google’s terms to use its proprietary platform. If it was ever accurate to refer to Android as an open source platform, it’s clearly no longer true today.

Yes, by using an ad-supported (two-sided market) approach Google doesn’t have to charge royalties, but that doesn’t make it free (as in speech or as in beer). With 42% of the US mobile ad market — and Android accounting for the majority of US smartphones — Google makes billions off of Android users. Google’s preloaded apps command choice real estate, and if Google didn’t control this real estate, handset makers could sell this real estate to the highest bidder.

So despite all the rhetoric, Google is just another tech company that wants to rule the world and make zillions for its founders and executives. It controls its technology to gain maximum advantage, and (like many firms nowadays) uses openwashing to render spotless its proprietary motivations. This shouldn’t be surprising. It won’t be a surprise for anyone who reviews the how Android evolved (and the strategy emerged) over the first five years.

Bob Galvin turning in his grave

Wednesday Google announced it is dumping Motorola by selling it to Lenovo, the same company that bought IBM’s PC business when it decided to exit.

CEO-founder Larry Page wrote:

We acquired Motorola in 2012 to help supercharge the Android ecosystem by creating a stronger patent portfolio for Google and great smartphones for users. … But the smartphone market is super competitive, and to thrive it helps to be all-in when it comes to making mobile devices. It’s why we believe that Motorola will be better served by Lenovo—which has a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world. This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.

Just to be clear, Google is abandoning commodity markets, not hardware:

As a side note, this does not signal a larger shift for our other hardware efforts. The dynamics and maturity of the wearable and home markets, for example, are very different from that of the mobile industry. We’re excited by the opportunities to build amazing new products for users within these emerging ecosystems.

This is obviously a big deal for Google, for the smartphone industry — and readers of this blog. There are so many angles that went through my head — but then I went off to spend 36 hours seriously focused on teaching (plus meetings). Fortunately, I can summarize most of the angles from the reporting that’s happened since then.

Google's Losses

Google spent over $12 billion to buy Motorola in mid-2012, and is selling it for $2.9b. Only $0.66b is cash and the rest is stock and IOUs. In an article entitled “Buy High, Sell Low,” John Paczkowski (formerly of the Merc and AllthingsD) wrote “the whole affair is arguably one of the worst investments in Google’s history.”

However, the net is a little better than a $9b loss. Minutes after the announcement, Tom Gara of the WSJ calculated

Google paid about $12.5 billion for Motorola Mobility when it acquired the company in 2012, and that came with about $3 billion of cash. It later sold off the company’s unit that makes cable TV set-top boxes for $2.35 billion. Now it’s selling off much of what’s left for $2.9 billion, but keeping all those patents.

The WSJ reminded us Thursday that “Google had absorbed roughly $2 billion of operating losses through the third quarter of last year,” bringing the net cost to $6b.

Friday, the WSJ had a second-day story “How Google's Costly Motorola Maneuver May Pay Off”. This is a fairly transparent effort by the company (or key executives or allies) to try to put a positive face on their huge loss. While the Google goals (promoting Android, fighting Apple) made sense, the purchase had only a small impact on the industry and was a terribly inefficient way to accomplish these minimal results.

The bottom line is that Google ended up spending more than $6b, and all they have to show for it is the 17,000 patents of MMI. Not only did they overpay, but with the losses this is even worse than what they booked on their balance sheet. As Bloomberg reported last April:

Google…estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology. Chief Executive Officer Larry Page in August 2011 said Motorola’s patent portfolio would “help protect Android from anticompetitive threats from Microsoft, Apple and other companies.”

Of course, Google has had difficulty monetizing these patents — either offensively or defensively — in support of Android. (The one exception was this week’s cross-license deal with its major Android customer, Samsung, on undisclosed financial terms).

Google’s Mobile Patent Strategy

So how’s that investment working out? As with any mobile patent issue, the definitive source is the FOSS Patents blog. Florian Mueller didn’t pull any punches Thursday:

Things haven't been going too well for Google in the patent litigation arena recently.
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At the moment Google appears to be on a losing streak in U.S. patent courts, and as I said further above, more bad news is probably coming in the near term. Google's patent infringement issues are definitely a key reason for its push for patent reform legislation, and I doubt that Congress will solve Google's problems anytime soon. There will either be a quick agreement between both chambers of Congress on a targeted and limited reform bill or things will take much longer.

He lists Google patent lawsuit losses to SimpleAir and Vringo, and Samsung’s loss on Apple’s auto-correct patent (presumably signaling future losses by the remaining Android handset makers). In addition, major licensee Huawei settled with the Rockstar Consortium — which suggests to me that Android licensees except Samsung will probably do likewise. (Wikipedia helpfully explains that this patent troll paid $4.5b for the Nortel patents — the largest patent portfolio ever sold — and that Apple, Microsoft and Sony are part-owners.

If that’s not bad enough, Mueller predicts that Motorola is also likely to lose its case to Intellectual Ventures (the Nathan Myhrvold patent troll).

In defense of Google execs, this mobile phone patent litigation among handset makers is relatively new, and it was not obvious how it would turn out. Still, it’s clear Google knew little about this business model, didn’t have a lot of their own patents, and took the shareholder’s cash to buy the biggest stash of patents they could find (valuation be damned).

Greater Fool Theory

Of course, for every seller there is a buyer. Lenovo seems to think that what’s left of the Moto mobile franchise is worth $2.1b in cash and IOUs (plus 5% of their company).

A friend of mine noted that parallels the habit of Asian companies over the past two decades to buy money-losing US PC companies:

• AST Research: bought by Samsung (1996)
• Packard Bell: bought by NEC (1996)
• Gateway: bought by Acer (2007)
• IBN’s hard disk division: bought by Hitachi (2002)
• IBM's PC division: bought by Lenovo (2005)
• IBM’s PC server division: being bought by Lenovo (2014)

So far, it appears that the first two (market-leading IBM businesses) were worth buying. The others (top 10 but not top 3) only transferred value from Asian CEO egos to struggling American shareholders.

Death of an Icon

All this aside, what occurred to me when I heard the news was that the late great Bob Galvin (1922-2011) must be turning in his grave. Here is the an excerpt from the obit I wrote:

Robert Galvin died last week at aged 89. The second of three generations of Galvin CEOs at Motorola, he was clearly the best, guiding the company to its period of greatest success (1959-1997).

In addition to serving as Motorola president, CEO and chairman, Galvin was chairman of Sematech and helped create the Six Sigma movement in the United States. For more than 20 years, Galvin was a Notre Dame trustee and later fellow.

There is a great video on Galvin’s seminal contributions to the wireless industry, prepared by the Marconi Society when they gave him a lifetime achievement award. In that video, I argued that Galvin’s two great contribution was to create the system of competing US licensees in cellphones (something that no other market had yet considered) and to push portability, miniaturization and mobility in cellphones — i.e., to create our modern industry. Yes, without Motorola we would have eventually had such a mobile industry, but the company shape how we got here and got us here sooner.

Bob Galvin spent his last years at Motorola doing two things: fighting against trade barriers for Motorola products overseas (notably in Japan), and promoting a resurgence in manufacturing quality for American electronics to be able to compete with foreign (i.e. Asian) producers. In 1988, Motorola won the Malcom Baldrige National Quality Award for manufacturing in its inaugural year.

His company is no longer the market leader it once was, having come late to the digital era and wasted $7b on Iridium (back when that was real money). Before he died, the company’s decline was palpable and surely known to him. Still, I have to imagine he is turning in his grave.

Google gets the competition it deserves

At this week’s Mobile World Congress, the conference is focused on what happens next, now after Android has captured the majority of the world’s smartphone sales — and continues to gain share. Some distant clouds are on the horizon.

The WSJ this week asked whether the leading Android vendor, Samsung, is going to assert its buyer power against Google.

Google executives worry that Samsung has become so big—the South Korean company sells about 40% of the gadgets that use Google's Android software—that it could flex its muscle to renegotiate their arrangement and eat into Google's lucrative mobile-ad business, people familiar with the matter said.

The story said “Android head Andy Rubin … said Samsung could become a threat if it gains more ground among mobile-device makers that use Android.” The WSJ followed up with a blog posting asking “Can Samsung’s competitors catch up?” while Fierce Wireless reported a Samsung VP’s denial that Samsung’s success threatens Android.

The original WSJ story speculated that Samsung might ask for better terms, e.g. preferential access to technology.

In some ways, we’ve seen this story before. Symbian was supposed to be an open multi-vendor platform, but when Nokia accounted for 80%+ market share, it transformed both the Nokia-Symbian relationship and the level of interest and commitment by other vendors to Symbian. Yes, Google’s much richer and more independent than Symbian ever was, but it faces some of the same pressures that Symbian did. As it is, Samsung is making more profit from Android phones than Google is (an interesting reversal of the Microsoft-Dell exemplar).

(Google’s downstream vertical integration into Motorola is offered as an insurance policy, but since Motorola has been slowly dying for a decade, it’s not clear how credible a bargaining chip that is.)

Similarly, Samsung continues to support Tizen (the embedded Linux successor to LiMo, Moblin and Maemo), and plans on offering a new phone based on Tizen this summer. Samsung is using Tizen as an upward compatible replacement for its homegrown Bada, but it’s unclear how credible a bargaining chip Tizen will be — since it hasn’t offered a new Bada phone in two years.

The other challenge to Android comes with the introduction of the Firefox OS. Since handset OS makers — Google, Apple, Microsoft — are promulgating their own browsers, apparently the Mozilla Foundation figures they need an OS to put their browser into people’s hands.

The Firefox OS won support from LG, ZTE, Huawei and Alcatel, as well as serious interest from Sony (née Sony Ericsson née Ericsson) — but not from Samsung. It’s expected to ship from 18 carriers in nine countries, but not the US until at least next year.

There’s of course the question whether the world needs another smartphone OS, let alone another open source OS (remember webOS). After Android (69%) and iPhone (22%) together have 81% of the market, no other platform has more than 5% — with Tizen and Firefox starting behind Blackberry, WinMo and Symbian. But there’s no guarantee that the most popular OS in the US or Europe will be the most popular OS in China, particularly when China’s two largest handset vendors are supporting both Android and Firefox OS.

So based on recent history, Google’s concern in developed markets should be Samsung throwing its market power around (either within Android or to a rival platform), rather than having Firefox (or BlackBerry or WinMo) catch it any time this decade. It needs monitor Tizen or Firefox in the BRIC countries, but that could just be a matter of providing extra tech support engineers for Huawei and ZTE.

Do no evil or see no evil?

In a unanimous decision Thursday, the Federal Trade Commission ended its two year investigation of alleged Google antitrust violation, with a settlement agreement that (as several headlines put it) let Google off “unscathed.”

The FTC took almost no action on allegations that Google tied its dominance in search to support its other businesses, accepted some unenforceable promises by Google to behave in the future, and (in a separate action) set limits as to what Motorola (now owned by Google) can do to pressure rivals to license its patents.

The reactions were predictable. A "consumer" group that criticizes Google told the AP that “The FTC rolled over for Google” (perhaps the AP censors made them clean up their language). Microsoft lamented that Google’s “voluntary commitments” were “less demanding than the pledge the U.S. Department of Justice received from Apple and Microsoft nearly a year ago.”

Outgoing Republican FTC commissioner J. Thomas Rosch dissented from this approach in similar terms:

Instead of following standard Commission procedure and entering into a binding consent agreement to resolve the majority’s concerns, Google has instead made non-binding commitments with respect to its search practices. … [O]ur “settlement” with Google creates very bad precedent and may lead to the impression that well-heeled firms such as Google will receive special treatment at the Commission.
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Our “settlement” with Google is not in the form of a binding consent order and, as a result, the Commission cannot enforce it by initiating contempt proceedings. The inability to enforce Google’s commitments through contempt proceedings is particularly problematic given that the Commission has charged Google with violating a prior FTC consent agreement.

Enforcement of Google’s obligations requires a Commission order, not a unilateral commitment by Google to stop its practices. If Google were really willing to abandon its scraping or its API policy, it would have tendered a consent decree to that effect instead of a unilateral commitment that is not enforceable.

Meanwhile, on the other side, Google’s head lawyer bragged: “The conclusion is clear: Google’s services are good for users and good for competition.” Former FTC chairman and part-time Google consultant James C. Miller (III) wrote in Friday’s Wall Street Journal:

The legal case against Google was always weak. Despite the rhetoric of Google's antagonists, they failed to convince the FTC that the company's policies harmed consumers. Since consumers can change search engines with the simple click of a mouse, it's a stretch to say that Google has monopoly power.

It’s surprising to hear a Ph.D. economist claim there are no barriers to entry; this is just a rock of hooey (nod to censors). Perhaps he’s just not up on current research: Network effects are a strong barrier, and in a two-sided market of advertisers and eyeballs, those that get ahead tend to stay ahead.

The decision comes as somewhat of a surprise, since the Obama administration has a 3-2 majority on the FTC and was expected to take a harder line on antitrust. Cynics might say that it’s because Google was Obama’s largest and most loyal re-election donor ($31 : $1) among Silicon Valley’s 10 biggest companies. Coincidentally, Obama’s latest FTC appointee — George Mason professor Joshua Wright — will be recusing himself on Google matters for two years because he’s taken money from Google.

However, for Google critics there is the minor matter of proof. In the US antitrust system, wanting to crush your enemies so you can extort monopoly profits from your customers is not actionable — you more or less have to do it first because it has to be proved in a court of law. The US (at least until recently) has had a greater emphasis on unfettered markets than Europe, where protecting

Instead, most of what Google conceded were items that it had already lost or was likely to lose (the ruling on licensing Motorola’s standards-essential patents is a complex one I hope to take up later).

NYU law professor James Grimmelmann blogged that the FTC didn’t say it found no evidence, but that Google is doing what is legal. His analysis of some key quotes:

• Google was pure of heart: “The totality of the evidence indicates that, in the main, Google adopted the design changes that the Commission investigated to improve the quality of its search results, and that any negative impact on actual or potential competitors was incidental to that purpose.”
• Google helped users when it helped itself: “Notably, the documents, testimony and quantitative evidence the Commission examined are largely consistent with the conclusion that Google likely benefited consumers by prominently displaying its vertical content on its search results page.”
• The data agree with Google: “Analyses of ‘click through’ data showing how consumers reacted to the proprietary content displayed by Google also suggest that users benefited from these changes to Google’s search results.”
• Everyone else did it, too: “We also note that other competing general search engines adopted many similar design changes, suggesting that these changes are a quality improvement with no necessary connection to the anticompetitive exclusion of rivals.”

And, Prof. Grimmelmann concluded, this exoneration will make it that much harder to initiate or win a U.S. legal challenge to Google monopolistic activities in the future.

Anyone who knows Google knows that it is no more “pure of heart” than Microsoft was in the 1990s or IBM in the 1970s. Microsoft called this “freedom to innovate,” a variant of the “what’s good for General Motors is good for the country” argument.

Like Microsoft, Google pushes for self-regulation of the “trust us” variety. Unlike Microsoft, Google’s mantra of “do no evil” seems to have convinced many that it’s fundamentally trustworthy, despite their pattern of hubris (if not arrogance) and demonstrable efforts to attain Total World Domination.

The timing was particularly unfortunate. This morning's front page WSJ article documents how Google is using tying to support its once-moribund social media experiment, Google+. As Amir Efrati wrote

Google Inc. is challenging Facebook Inc. by using a controversial tactic: requiring people to use the Google+ social network.

The result is that people who create an account to use Gmail, YouTube and other Google services—including the Zagat restaurant-review website—are also being set up with public Google+ pages that can be viewed by anyone online. Google+ is a Facebook rival and one of the company's most important recent initiatives as it tries to snag more online advertising dollars.

The impetus comes from the top. Google Chief Executive Larry Page has sought more aggressive measures to get people to use Google+, two people familiar with the matter say. Google created Google+ in large part to prevent Facebook from dominating the social-networking business.

(In my experience, Google’s approach is similar to Facebook and Twitter, but for the latter it’s more obvious when you are sharing related information than with Google. Also, these firms lack the control of other Internet services such as Google’s search, mail, photos, video, news, maps, telephony, music downloads, book downloads, blogging or cloud services).

For now, the only remaining hope for the anti-Google forces is to win support from governments outside the US (as Sun fought Microsoft in Europe and Japan). As Microsoft and Intel learned, the EU can pretty much do what it wants to American tech companies.

It’s also possible that a publicity seeking attorney general in the Empire state or another state will sue Google in hopes of gaining name recognition for a gubernatorial run. Who knows, perhaps New York’s lame duck billionaire mayor and America’s 21st century Napoleon will throw his corporate empire, bully pulpit and money in support of the effort.

Open platforms enable open competition

The Twitterverse last night was agog with the breathtaking news that Google Maps would be returning to the iPhone any minute now. Sure enough, the app was released at the end of the business day and an iPad version is due Real Soon Now.

This brings some closure to the whole painful episode for Apple. Apple's execution, QC and timing were badly flawed but the strategy was basically sound. Meanwhile, Google gets a badly needed PR win and causes the million of iPhone and iPad owners to trust Apple just a little less.

The whole episode shows an essential attribute of open platforms: enabling intra-platform competition. Openness has many dimensions [link] and degrees: normally pundits focus on whether the core code is available to rival companies (Android vs. iPhone) or the IP is free (Linux vs. Windows), and occasionally whether the platform control is shared, permeable and transparent (Linux vs. Android).

As I noted in my 2007 book chapter on openness, nearly all platforms are open to third party applications: they're essential to the value of most (but not all platforms). There are exceptions, as when Microsoft used selective access to technical information (as well as superior execution) to help Word and Excel crush WordPerfect and 1-2-3.

In practice today, openness for third party applications is rarely a technical or contractual, merely one of business models. Healthy, open platforms give customers access to the widest range of choices, as when Google’s Chrome browser allows users a choice of search engines.

Competition is what gives customers efficiency and choice. It's as essential in platforms as in politics. Even government competition is healthy for society — as is sometimes found within the US, German or Canadian federal systems — at least until such time as all regulators become omniscient, infallible, incorruptible and selfless.

While iPhone users will no longer get lost, Apple still needs to release its own updated Map application. Apple’s app may never be as good as Google’s, but the availability of its own map but it will keep Google honest. Already it seems to have worked, with the new Google app providing the features that Google once held exclusively to Android to provide its own platform an advantage.

As long as Google controls a rival platform and can use its apps for differentiation, Apple still needs to develop its own map application. Meanwhile, giving its users the choice of two (actually three) serious map applications supports a key aspect of the iPhone/iPad value proposition: having the widest variety of third party software.

Google still winning cloud race

I now have firsthand experience with various cloud based email services, and Google still remains firmly in the lead.

My life is pulled in (at least) three directions when it comes to cloud-based (aka hosted, aka SaaS) mail services:

• This month, my employer (a Microsoft shop) decided to migrate from an Exchange server to the Office 365 hosted services. I guess as an IT-knowledgeable employee, they made me one of the guinea pigs. So this week I'm trying to reconfigure my Mac and cellphone to work with the new servers.
• Meanwhile, on July 1, my wife was forced to migrate from mac.com (aka me.com) to iCloud. As the household IT support desk, the task fell to me, and we still haven’t been able to get it to work with her Mac.
• Finally, my teenager and I are loyal users of gmail and other Google services. My teenager won’t use a client app anymore, while I use my various gmail addresses with my Eudora client. Both of us also use Google Voice.

(I also have an old Yahoo web mail account, but since they don’t support client apps for free, I only give that email address for website registration and other spammers.)

From what I’ve seen so far, Google remains far ahead for web-based services. This is not to minimize the advantages Microsoft and Apple have for their locked in proprietary client customers.

A few years ago, Google and MS were warring over providing hosted mail and office apps to the 23-campus California State University system, America’s largest university system. Google won and at SJSU we were migrated in mid-2010..

However, before that the SJSU business school was an Exchange shop, as was my previous b-school and my current employer. So despite being a Mac user since 1984, I was forced to deal with Mac/Exchange interoperability issues (which as much better than when I was researching my dissertation 15 years ago).

Microsoft Outlook Web Services are not very impressive so far. The web client seems slower than the old MS web app.

It was terrible — absolute pits — for explaining how to configure a 3rd party client (cellphone or whatever). First off, can’t find that help starting from scratch in the online help. I could only find it because my employer provided a link. Secondly, they don't publish their POP/IMAP/SMTP server settings on a web page like normal web services. Apparently the settings are client-specific (which suggests their DNS load balancing technology is inferior to Google’s) Third, if (after logging in) you want to find the mail settings, the steps are so complicated that they want you to watch a video. Since I was on a lousy airport WiFi connection, I figure out how to get through the various windows (also buried in their web page) to find the answer.

On the Apple front, the iCloud migration is going badly. Mac.com and Me.com supported Internet standards, but iCloud deletes POP support and their IMAP implementation is incompatible with my wife’s Eudora client. So we are stuck on webmail until we find a replacement for the client or iCloud.

Meanwhile, Google has a huge lead in features and design. The gmail server supports all the protocols, multiple desktop and mobile clients. And if you find the mail server or client too limiting, you can forward to any other server.

Yes, Apple is going to get me.com customers from their iPad lead and iPhone sales, and Microsoft is going to pick up all the firms that run all-Microsoft shops. But if an IT manager is try to pick the best solution, Google seems to be winning both on its execution and its standards-based approach (allowing third-party integration).

To innovate like Apple, you need the common touch

Wall Street analyst Henry Blodget has a fascinating post comparing the alumni networks at Apple and Google. In Blodget’s view, Apple uses technology to make useful products while Google is run by brilliant technologists. He sees this as a function of their hiring decisions:

More specifically, Google, which is led by founders and executives who posted amazing grades at the country's top universities, is legendary for hiring only the smartest people it can find--with Google's definition of "smart" being based on the applicant's GPA at a top university and the applicant's ability to handle interview questions that would flummox the vast majority of human beings.
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Like most people who work at Google, Steve Jobs was brilliant, but he likely never would have been able to get hired at Google. The Google hiring algorithm would have taken one look at his flaky educational background and concluded that he would never have amounted to anything.

He then quotes charts (built from LinkedIn) that show that Stanford and Cal are the most common alma mater at Google, while San Jose State is most common at Apple. (All three colleges account for 3% of their respective employers). Blodget concludes:

I'm going to guess that Google does not employ all that many people who went to San Jose State. And I'm going to further guess that Google does not employ them because Google does not consider them smart enough or accomplished enough to work at Google.

But it seems safe to say that most mass-market consumers--the folks Google hopes will one day love its products as much as they love Apple products--are less like people who went to MIT (Googlers) than they are like people who went to San Jose State.

So I'm going to suggest, respectfully, that if Google wants to design products that are as beloved by normal people as Apple's products are, it might want to hire a college dropout or two. Or at least a few more folks who went to universities like San Jose State.

As someone who taught at SJSU for nine years — including in the honors and MBA programs — I know our best students were very good. I had not thought to think that a company founded by a college dropout might be more focused on results than academic credentials.

Antitrust won't help Google's codec fight

Nowadays, Google is normally considered the next monopolist on the losing end of antitrust scrutiny. This month, Google is getting help from antitrust authorities in its uphill efforts to get VP8 video codec (and its WebM project) established against the dominant H.264 codec.

In January, Google announced plans to drop support for H.264 in its Chrome browser, nominally because of the H.264 patent royalties. Meanwhile, Google licenses VP8 and its associated patents with the claim that it’s royalty free:

Please explain how WebM is "royalty-free."

Some video codecs require content distributors and manufacturers to pay patent royalties to use the intellectual property within the codec. WebM and the codecs it supports (VP8 video and Vorbis audio) require no royalty payments of any kind. You can do whatever you want with the WebM code without owing money to anybody. For more information, see the License page.

However, all Google can promise is that it won’t charge royalties on VP8. It can’t promise that its source codec doesn’t infringe the patents of others: that’s up to the patent holders to allege and (ultimately) for a court to decide. (Its policy is that people can’t use WebM without licensing their own patents to WebM users.) The only way around third party patents would be for Google to indemnify users against these claims.

Since MPEG LA is in the business of managing and licensing patent pools, including a pool of some 800 patents that read on H.264 (including 273 US patents and 469 Japanese patents) it has long expected that many of these patents could also be essential for implementation of VP8. So last month it asked all parties (both current and other licensors) to submit their patents for review. Needless to say, this brought squawking by Google and the usual anti-software patent crowd.

Now, the Wall Street Journal reported that the US Justice Department is looking to help Google in its efforts to resist MPEG LA patents:

Antitrust enforcers are investigating whether MPEG LA, or its members, are trying to cripple an alternative format called VP8 that Google released last year--by creating legal uncertainty over whether users might violate patents by employing that technology, these people added.

The Justice Department and Federal Trade Commission start many more antitrust investigations than they bring to court. There is no per se legal problem if patent holders want to charge royalties to VP8 users, as long as they are on comparable terms to those charged to H.264 users. As the FTC antitrust website states:

Restraints in the supply chain are tested for their reasonableness, by analyzing the market in detail and balancing any harmful competitive effects against offsetting benefits. In general, the law views most vertical arrangements as beneficial overall because they reduce costs and promote efficient distribution of products. A vertical arrangement may violate the antitrust laws, however, if it reduces competition among firms at the same level (say among retailers or among wholesalers) or prevents new firms from entering the market.

So the only problem is that MPEG LA wants to run the licensing business for both H.264 and VP8. Normally in competing standards (think Blu-ray vs. HD DVD) competing organizations run the patent pools. So while the DoJ will not find anything wrong with charging patent royalties for VP8, it might force MPEG LA to exercise greater transparency in royalties or even to spin off the VP8 pool efforts.

The research has clearly shown that patent pools increase the efficiency of patent collection for both licensors and licensees. (The only downside is that licensees might hope that without pools that would-be licensors might not bother to enforce royalties.)

If MPEG LA comes under pressure, I think it could easily solve the transparency problem by separating royalties into three piles: patents that apply both H.264 and VP8 (or WebM), those that apply to H.264 and those specific to VP8. If the terms for the first pile are the same for either standard, VP8 supporters would be hard-pressed to show any anti-competitive effects of the patent policy — other than their fantasy of releasing a patent-free codec.

All this kerfuffle over MPEG LA royalties ignores three other factors:

• the effect of the annual royalty cap (as with H.264) in making MPEG LA royalties negligible for large firms like Apple, Google or Microsoft
• as with any other standard, the existence of other patents that are not “essential” to the standard but may be commercially necessary
• Google’s ability to use its own patent leverage (including those it acquired when it bought the WebM developer) to force a cross-license or non-assertion agreement by key patent holders

Google vs. Apple distribution price war

The first year of the tablet wars went entirely to Apple. Apple has the market share, installed base, the mindshare and the superior product. Most projections have Apple crushing the competition again this year, albeit by a lesser margin.

However, Apple needs to take seriously Google’s latest salvo in the tablet content distribution fight. If Apple hopes to keep the iPad the dominant tablet — in a way the iPhone and Macintosh never were and never could be — it needs to take this attack seriously.

Apple won many fans among software developers for its convenient app store in exchange for a 30% commission. But its proposal to extend commission to newspaper, magazine and all other subscriptions has been highly unpopular, and some have questioned whether this is really tenable in the long haul.

Then on Wednesday, Google said it would only take a 10% cut for its One Pass content store, a direct attack on Apple’s pricing model. (Isn’t competition great?) Although online distribution is a low value-added commodity — with oliogopolistic competition — I think Google can hold a 10% margin, because both Apple nor Amazon tend to prefer margins better than that.

If most of the online tablet media goes through such services, then Apple can make plenty of money on a 10% margin. The problem is protecting its margin for other App Store products. Already, publishers and developers have been trying to bypass paying Apple — using Apple to distribute free apps and trying to charge outside the app. Apple closing the loophole is fair — it deserves some compensation for its distribution — but its plan to keep 30% is not.

So will apps be 30% and content be 10%? Will everything be something in between? Will Apple be in denial about the price war until its share drops below 50%?

Apple already seems to have lost the book distribution fight. iBooks was stillborn, and I can’t see how it will ever catch Barnes & Noble, let alone Amazon or Google. Are magazines and newspapers the same distribution channel as books? I don’t think anyone can say for sure.

Apple was reasonably aggressive in responding to Amazon’s efforts to abolish DRM on music downloads, so I expect we’ll see their answer on or before the rollout of the iPhone 5 this summer. Will they protect their margins on the assumption they can hold the market another year, or will they respond aggressively to protect every bit of market share? That I can’t predict.

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.