Big picture: technology trumps financial engineering

From the WSJ Wednesday:

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

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

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

Google's war on semi-open standards

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

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

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

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

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

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

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

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

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

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

Farewell to the Gaffer-in-Chief

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

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

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

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

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

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

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

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

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

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

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

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

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

2010: officially year of the iPad

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

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

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

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

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

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

Commoditization is hell

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

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

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

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

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

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