Is Silicon Valley still dominant?

In summarizing the Nokia “Web 3.0” article, I forgot to mention one key point. The whole tenor of the article (and the accompanying series) is part of the Merc’s crusade to reassure locals that Silicon Valley is still the center of the technology world. For example, this photo caption from Sunday’s paper (not on the web):

SMART-PHONE HUB
Engineers test imaging technology at Nokia Research Center Palo Alto. The opening of the facility a year ago illustrates how the valley’s pre-eminence as an incubator of innovation has been enhanced by economic globalization, not diminished.

Monday’s Part 2 carries on the theme with the headline “Valley’s edge: Success hard to copy.” I’m sorry, but this is way too Pollyanna-ish for my taste — seriously in denial as to the reality of globalization and the product life cycle.

I have no problem saying that there are times that the jobs moving to Silicon Valley outnumber those leaving the valley, and that more such times may lie ahead. But technology jobs are moving to Singapore, Tel Aviv, Banaglore, Beijing, Kiev, and any number of other places, not to mention other technologies being created and growing where the center of action is elsewhere (like Helsinki and Tokyo for mobile phones). So as with any other high-wage, high value-added industrial cluster, Silicon Valley faces the constant challenge of re-inventing itself to find new innovations that can only be created here. It can be done, but it’s not a sure thing.

I’m sure the CEOs and VCs of Silicon Valley don’t believe that SV is invincible, because for the past decade they have been pouring their money into other parts of the world. For many entrepreneurs, there is no other option — the kids’ soccer league and public schools are here, as are their professional networks — so they will start firms here no matter what. As in the past 50 years, some of these will succeed and many will fail.

But what about employment of the rank-and-file? Like London and Geneva, the Bay Area is becoming impossibly expensive for clerical staff, schoolteachers, cops etc. etc. (For example, for hospitals Northern California has 9 of the 10 most expensive labor costs in the entire U.S., a third higher than the national average.) Eventually these labor costs will push the cost of middle class living even higher. So even with the success of valley companies, how much of that success will accrue to local employees and the local economy?

The so-called Web 3.0

The business section of Sunday’s Mercury had a big cover article on Nokia’s presence in Silicon Valley, specifically the Nokia Research Center Palo Alto. Besides being a great place to host a Mobile Monday meeting, the article notes that the center has about 50 employees — apparently drawn from the alumni of some of Silicon Valley’s best companies. (The NRC PA director, Bob Iannucci, once was VP of research for Compaq and with it, head of DEC’s famed Western Research Laboratory.)

Not surprisingly, the Page Mill Road location is enabling "Nokia's new research relationship with Stanford University." (The normal translation: Nokia is putting up money to support Stanford research or access to that research). In 2006-2007, the two jointly hosted a series of research talks at Stanford.

Most of this was the customary “foreign MNC comes to Silicon Valley” story (to access talent, partners, etc.) But the title was provocative if not silly:

WEB 3.0’s CENTER
Phone giant Nokia navigates Internet’s third wave from Silicon Valley base

The explanation is buried within the story:

Nokia's efforts, Iannucci said, are aimed at maintaining the company's market lead as handsets equipped with robust Web capabilities - communications, search, video and more - become the third great wave of commercial opportunity.

The first wave, Iannucci said, represented "the democratization of consumption of information. Web 2.0 is about the democratization of information production. Web 3.0 - the next step - takes Web 2.0 and makes it mobile."

The term “Web 3.0” shows up frequently on the Web (2.0? 1.0?). Right now it’s a meaningless buzzword that means “new and improved,” right up there with “4G.”

Apparently I know a little more than the credulous Merc reporter about the mobile Web 2.0, having studied it for the past 5 months while supervising the forthcoming master’s project by Eduardo Sanchez and German Benitez. The short answer is that some Web 2.0 is desktop based, some is mobile, and some is both. So it’s ludicrous to suggest that adding things like ubiquity or mobility to existing Web 2.0 plans is going to transform this into Web 3.0, even though it will make Web 2.0 more widely available and more powerful.

A better definition of Web 3.0 is the semantic web — one where we are finding information based on meaning and not keywords. Interestingly, a Nokia researcher published an article promoting this definition in a peer-reviewed IEEE journal last June.

Another mobile carrier's CFIT plans

Earlier this year, I referred to T-Mobile’s denial of the inevitable commoditization of mobile phone network operators. It's happened to everything else in telecom. Now even international long distance is effectively free, thanks to VoIP carriers like Skype and my new favorite Lingo (which includes unlimited long distance to 23 countries for $22/month).

Sometimes I want to say it's a train wreck waiting to happen. But after reading the weekend transcript of the Financial Times interview with Vodafone's CEO, I think the more accurate metaphor comes from aviation crashes: CFIT, controlled flight into terrain.

The CEO is Arun Sarin, a former Pac Bell executive who (only about 100 km from here) designed the technology for its industry-leading cellphone services in California during the 1980s including the 1984 LA Olympics. Sarin then helped Sam Ginn spin off PacTel Cellular to form AirTouch, which later got bought by Vodafone and then merged with Verizon's US properties to form Verizon Wireless.

The FT news article (full text here) highlights' Sarin's atypical opinion of the iPhone, but he's certainly right that 2.5G is a lousy way to watch YouTube. More seriously, The Register notes his excess optimism about his long-term pricing power due to inexorable increases in competition.

Sarin admits that the mobile phone service will be a flat monthly fee within 5-10 years, although he still hopes to exercise price discrimination with multiple minute bundles. Presumably he's not worried about existing flat-rate mobile phone services.

He also expresses the heartfelt desire that his pipes won't become commodities, and that his walled gardens will somehow compete with the likes of Google and Nokia. Vodafone will triumph because it owns the billing relationship and because no one can build LBS without paying it a toll:

"Most importantly, we have 240m customers. We have the relationship with the customer, they are either buying top-up cards from Vodafone, or we are billing them on a monthly basis. Just the simple fact we have the customer and billing relationship is a hugely powerful thing that nobody can take away from us. We could lose our customers and then, yes, they could be gone.

“The second thing is we know where the customers are, in terms of location. We know precisely where you are. Frankly only we know where you are. The handset manufacturer that sold you the handset does not know where you are. But we know where you are.

“So if you say at the most basic level say we have got a customer relationship, we have got billing and we know where you are, these are hugely important things. So whoever comes into the marketplace is going to have to work through us."

So no one will get on the Vodafone network without paying Sarin's toll — faithfully recreating the AOL/BOL/CompuServe/NiftyServe walled garden model of the 1980s. Meanwhile, industry upstarts will be building a 21st century mobile version of the Internet with as much free (or cheap) third party content as possible. I guess it will be up to the next Vodafone CEO to deal with the consequences.

[Mixed metaphor alert] Sarin notes he still comes back to California (and Hawaii) to surf with his son, so he knows what a wipeout is. I guess he's trying to ride the wave as long as he can, but at 53 the eventual crash is going to come long before he reaches retirement age.

Kindling a feeling of deja vu all over again

Despite his mangling of the English language, Yogi Berra's aphorism has captured an eternal truth that applies to business history. This week's example is yet another e-book reader: in one of the worst-kept secrets ever (too many discussions with gossipy publishing-types?), Amazon's Jeff Bezos finally unveiled the Kindle.

Attempts at establishing e-books date back a decade, with at least a dozen failed efforts. The big names have included Sony, Microsoft and Adobe. Yes, the technology is getting better — the E-ink reflective screen rather than a backlit LCD screen, and Amazon is using Sprint's 3G wireless network rather than sideloading for content access. It also includes limited e-mail and browser capabilities.

These information goods have high returns to scale, hence both the incentives for success and the inability to survive as a niche product. The question still remains: will someone pay $400 ($100 more than Sony's product) for a book viewer when he/she was born with the necessary equipment to view dead trees? Unlike newspapers, electronic delivery has displaced less than 0.1% of book sales.

Here Amazon is trying to use its distribution might (the upsurge of traffic during the Christmas shopping season) as well as its content relationships to succeed where others have failed. But the business model is fatally flawed.

I'm shocked that they didn't try to do more to solve the angry orphan problem. The device's only native format is its proprietary AZW, requires conversion to open .DOC and .html files, and doesn't do PDF at all. Books from AZW are only available from Amazon and only viewable on an Amazon device, so when Amazon throws in the towel there will be no way to view them. At least the iPod value proposition was primed through use of unprotected MP3 files, so that most of the iPod content (initially) could be played on any PC, MP3 player or other device.

There are clever attempts to make money off of newspapers, magazines and even blogs. I think they mortgaged their soul to provide ubiquitous connectivity (which today is still expensive in the US, unlike telecom commodities like e-mail and international long distance). They need free user-generated content to fuel ubiquity and adoption, but their connect fees won't allow it. Take a cell phone, add e-books, improve the MySpace/Facebook/YouTube web access, and stand-alone book viewers are toast.

Theoretically the COGS should be less for e-delivery, but the book pricing does not appear to be terribly aggressive (given the manufacturing and distribution savings), perhaps because the publishers fear cannibalism. Meanwhile, I get a book I can't lend to a friend, can't sell to a used book store and can't donate to my local library. Thanks to Amazon's inept strategy, many more trees will have to die needlessly.

The spin is that this is an iPod for books, but's only spin. John Paczkowski of the WSJ blog mercillessly lampoons it as "the Zune of reading."

Brad Stone of the NYT claims the problem is features, but I think it's all the business model. If they asked me what to do (they won't) to fix the business model, I'd make three changes:

• Support open document formats (HTML, RTF, even PDF) and then like the iPod, make those the native formats for public domain (no-DRM) content.
• Offer a monthly subscription that makes unlimited e-mail, web browsing, public domain works and free Internet content (like blogs) available at no additional cost.
• Get publishers to offer aggressive discounts for impulse purchases, such as 1-day specials for novels trying to build word-of-mouth to get onto the NYT bestseller list.
  

Stone also suggested advertising, which makes sense given the NYT.com's recent captitulation to the Google-ization of paid media.

I know one reader who today is certainly reciting Yogi Berra — the former COO of NuvoMedia, makers of the Rocket eBook, which exited through sale to TV Guide's parent. The Rocket eBook lasted less than three years, the Apple Newton not quite four, so I'll bet $50 (giving 2:1 odds) that Kindle is off the market by the end of 2010.

Two months of IT news

I’m done with grading my MBA classes and my undergraduate midterms, and thus can spend (a little) more time on the blog. During those two months, I set aside a large pile of stuff that I set aside to blog about. Since those items aren’t going to get their own article, instead I thought I’d write a combination article with a line or two on the items that I could find. My notes for September aren’t very good, but I can remember the recent run of interesting news:

• Sept. 10: I heard Richard Stallman give a talk on GPLv3 (hosted by Larry Lessig, show to the right). I even posted the pictures to Flickr, assuming I’d have time to blog about it. Stanford has a recording online in the obscure (open standard) Ogg Vorbis format, which requires installing a special player. According to my notes, Stallman claimed the major GPLv3 benefits are: international legal compatibility, patent retalliation clauses, anti-TiVo clauses, anti-DMCA clauses, and compatibility with other OSS licenses.
• Sept. 17: After denying the possibility, the New York Times cancelled its TimesSelect paid online content experiment. As Steve Johnson of the Chicago Tribune said: “the white flag has been waved on the notion that content in the digital realm is worth anything close to what it is in the tangible world”; since then, Rupert Mudoch has predicted he will take the WSJ in the same direction. Interestingly, running the numbers for an MBA assignment, it’s hard to see how the NYT could shift from dead tree to online content without a 90% cut in staff.
• Sept. 28: Palm probably helped its revenues with the introduction of the Centro. But it’s hard to see how a cheap version of the Treo solves the fundamental problem that its R&D no longer produces differentiation.
• Oct. 4: EBay’s $1.4 billion writedown of its 2005 Skype acquisition for $2.5 billion. As noted by skeptics at the time Skype was acquired, Skype has a lot of customers but not much of a revenue model (freemium or not). Or, as we used to say, “losing money on every customer but making it up on volume.”
• Nov. 4: The release of the new business memoir by Tom Perkins, the co-founder of Kleiner Perkins who shows why he was one of the few heros of the past decade of HP’s bumbling and mismanagement. The corresponding 60 Minutes interview wasn’t very insightful, as it mainly was about Leslie Stahl attacking him having for bitter policy fights with female business leaders. However, at least we got to see the Maltese Falcon, his 88 meter computerized sailing yacht that’s the size of a 19th century cargo ship.
• Nov. 9: Three months after I questioned the business model, Sprint dropped plans to implement WiMax in partnership with Clearwire. It’s a big negative for WiMax, a bigger negative for Clearwire, and also bad news for Craig McCaw, the non-executive chairman who controls Clearwire. On Nov. 14, allies of Clearwire chairman Craig McCaw leaked to the WSJ that he has other buyers seeking to bail out Clearwire, but that seems more like a negotiating ploy than real news.
• Nov. 9. Apple’s iPhone rolled out in the UK and Germany. Unlike the US rollout, I didn’t witness what happened but I gather the iPhone was achieved modest success. To confirm the latter point, on Nov. 13 the CEO of China Mobile (the world’s largest cell phone carrier) said he’s talking to Apple and his stock gained 6.6%.
• Nov. 11: In my Sunday paper, the Mercury News noticed that the unusual rash of IPOs of the dot-bomb era didn’t last, and (surprise!) that firms are being acquired rather than going public. Acquisition has historically been the exit strategy of most tech startups for the past 50 years — it was rare that everything worked just right to IPO (and in some cases, like Pets.com, that shouldn’t have gone public)
• Nov. 12: A great article by Steven J. Vaughan-Nichols announced that the Open Document Foundation has closed shop, alleging that the foundation’s founders Sun and IBM tried to sabotage document interoperability, and instead endorsing W3C’s Compound Document Format. I’ve had my differences with SJVN — he’s on the true-believer end of open source reporters — but he’s really captured well a complex story: in the end, neither the ODF nor CDF faction comes across as completely credible.
• Nov. 14: Katherine Boehret (Walt Mossberg’s deputy) doesn’t really care for the Zune — saying that this year’s Zune is competing with last year’s iPod. Of course, this conclusion does raise for Apple the classic question for innovation-based business models: if you stop being a moving target, the competition will catch up. Can Apple find something to do every year to differentiates its music-video players? It’s running out of ideas for the Mac, just as Sony did for TVs and VCRs and DVD players. (Yes, this year’s flat panel screens are better than last year’s).
• Nov. 16: Warner Music CEO Edgar Bronfman admits that “Jobs was right. I was wrong” in pricing iTunes downloads. I think this is evidence that (as with the NYT case), the changes for an online world will be wrenching but survival is possible.

I hope to resume blogging again — not as much as I did in July, but more than the past two months. I’m guessing that my focus will be on the gPhone and (related) Linux Mobile platforms, as well as my own research.