Who benefits from the shift from business to consumer drivers for technology?

Consumer tastes have overtaken the needs of business as the leading force shaping technology.

via New King of Technology – Apple Overtakes Microsoft – NYTimes.com.

Why is it that other “consumer-oriented” companies like Sony, Nokia and Phillips have not benefitted from this shift?  As far as I can tell they are no better off (and sometimes quite a lot worse off) than Microsoft has been during this transition.

Clearly, although the paradigm did shift to consumers, simply being consumer focused is not enough to benefit from this shift.

Conversely, simply being Enterprise focused (like Cisco or Oracle) has not caused dramatic loss of shareholder value.

Thus the focus is not causal to fortune.

From personal experience I can also recall that precisely at the time when the shift was beginning (think back to when “IT does not matter” was published) at least one of these companies was looking for ways to create “Enterprise Solutions”.

This hints at the cause rooted in strategy, or, more precisely, priorities and the courage to lead.

The Next Billion Users

Five weeks ago Apple forecast 100 million iPhone OS devices will be sold by summer. This was fairly easy to predict but the question comes up: when will the next 100 million be sold? And what about after that?

The iPhone OS three-legged platform is now the fastest growing platform ever and enjoying network effects which naturally accrue to platforms under solid custodianship. However, I am observing signals from Apple that they intend this platform to become the global standard for mobile computing, which, in today’s world, means targeting 1 billion users. Here are the signals that I’m noting:

1. Geographic and cultural universality. What plays in Peoria should play in Beijing.  As it has shown by being big in Japan, the iPhone crosses over cultural idiosyncrasies. Not long ago it was taken for granted that “mobile tastes” differ and “one size does not fit all” in mobile phones hence the need for hundreds of phone models in every portfolio. Apple has completely destroyed this myth. (One could ask why should mobile computers be polymorphous when their slightly larger cousins the laptops are rigidly monotonic?) By broadening the platform with multiple screens and connectivity options, Apple is cleverly spanning the jobs that he platform can be hired for.
2. Avoidance of a pricing umbrella.  Note that this does not mean being low prices, but rather, the protection of their franchise through pricing. Apple has developed a way to stretch a single product across multiple price bands, and carefully builds product to price and margin targets that have strategic placement.
3. Product cycles and product ramps. Apple has imposed upon itself a yearly product cycle for the iPhone and the iPod.  This is a brilliant move because it keeps the product fresh without having it seem disposable.  It also keeps competitors within its turning radius. However, the challenge is that the distribution network has to be filled rapidly and drained rapidly to maximize availability. This gets harder and harder as the volume grows. Imagine having to manufacture and ship into the channel a billion devices in less than a quarter.

I would point out that all these are marketing, not technical challenges. They are thinly disguised questions about product placement, portfolio, pricing, production and distribution–classic Marketing 101. (Promotion, which is what most people equate with marketing is not particularly challenging, especially for Apple who mostly does it through PR).

It is comforting perhaps to know that Apple is the best marketing organization in the industry today. So to answer the question, 100 million is in the rear-view mirror, 200 million will come up in no more than 2 years and 1 billion will take 5 to 8 years.

Will Apple rule the iPad market? (part II)

Continuing from Will Apple rule the iPad market? | Asymco.

The first claim is that

it is unclear if [Apple] will end up dominating the market the way it has come to rule the digital music player market with the iPod.

After hearing a thousand voices cry out that the iPad is nothing more than a bigger iPod touch (which, plainly, it is) it’s amusing to read that its similarity with a sibling ends when it comes to market performance.

Let me make one claim up-front: the iPad is more of an iPod than the iPod.

The original iPod was successful because it had a significant integrated value chain bolted on. Apple disrupted music with a value chain, not a product. It changed the way music is bought, consumed and even how it is produced. It changed the economics from retail down to songwriting.

This is why it came to dominate its market. Every competitor that took a run at it did so with a partial solution to the value chain. Often it was nothing more than a music player, and in some cases (e.g. Zune) it was bundled with some other pieces of technology, but poorly executed and too late.

The iPad comes with an even bigger value chain bolted on: the App Store. Apple is flogging not just an “app player” but also a new way to develop and distribute software. If you cut “music” and paste “apps” you see the immediate parallel between iPod and iPad. The app ecosystem will quickly grow to be larger than the music ecosystem with the mobile software business already eclipsing the music business.

A competitor launching a tablet device will have to somehow overcome the momentum of billions of downloads fed by hundreds of thousands of apps built by tens of thousands of developers for hundreds of millions of users.

The iPod juggernaut pales in comparison to the iPad supernova. The iPod had no apps or dedicated developers. Its ecosystem consisted of a handful of music companies. The only thing that made it “sticky” was the tie-in with one type of content.

The iPad on the other hand has a thousand other jobs to do for its users. It has a rich tapestry of functionality and a multi-dimensional (literally) user experience.  It’s a platform. It’s even powerful enough to impose new standards on the web itself and to suggest that search is a bygone activity.

So to suggest that Asus or Dell will somehow build “iPad killers” sounds asinine. These competitors don’t even grasp what the product is and what it’s for.  Sony said they don’t see a market for it. Microsoft, trapped in the innovator’s dilemma and overshooting the market by miles, said they don’t understand what the point is because users want full PCs.  Google asked what’s the value of a big iPod. I could go on, but there was not a single company in the industry who recognized what they were looking at in January. Apple keeps a tight lid on new products so that competitors don’t get a head-start on copying, but in the case of the iPad, advance knowledge would not have had any impact. Competitors look at the iPad and see nothing.  They’ll only react once the market explodes and they start to feel belated pain.

If, and it’s a big if, they do recognize what an iPad is, their response cycle is going to be measured in years. On hardware, they were blown away with a product that had twice the power, half the bulk, twice the battery life with half the price of what they had on the shelf. They may catch up on hardware in a year or two and launch some sort of iPad-like assembly of components, but that is like making the first iPod killer in 2002.

Then there is software. Their software supplier (Microsoft of Google) will have to build a platform that works. That will take years. Years during which the iPad will penetrate every geography, demographic and vertical market.

Google might move more rapidly than Microsoft, but they will produce an open source poster child of a platform. Fragmented and rough around the edges to the point of looking like a hobby project. Their flea market store will also have the smell of fresh glue about it. Microsoft is so far behind the curve that I don’t even think they will try to move the tiller.  Their view of the market was betrayed by the recently knifed Courier demoware. To suggest a challenge to the PC/Windows model inside Microsoft is a career-limiting move so don’t expect their brightest to be lining up to propose new platforms to management.

What about HP? Assuming they overcome the pitfall of NIH that kills 80% of integration efforts, they will still need to perform an enormous amount of heavy lifting to get WebOS to be a competitive experience on a tablet. Most opinions were that Palm came pretty close with a smartphone, but that was nowhere near enough to stay alive, never mind challenge iPhone.

Then there is the ecosystem. Building it is just not something I can even begin to roadmap. What about developer tools, SDKs, frameworks and evangelism? With a Palm division, HP is the best positioned of the PC vendors but it has a chance at being a player as much as Creative did vs. the iPod, or needless to say, Palm vs. the iPhone.

So the iPad challengers face five daunting obstacles:

1. Recognition of a threat from a seemingly benign product
2. Execution on hardware against the best integrator on the planet
3. Execution on software against a new UI metaphor fortress surrounded by a patent moat
4. Integration of hardware and software to a sublime whole
5. Re-building a value chain for which they have no handle vs. a broad and deep existing universe of app/content creation distribution and consumption enjoying logarithmic network effect value.

That does not even touch the logistics, sourcing, margin and pricing challenges of world-wide distribution of the whole value chain. Nor does it cover the lock-in of advertisers to new tools for creatives or the billions of daily views from a platform that is blindingly dazzling.

To put it in the language of disruption, by the time the competitors launch symmetric attacks on the iPad, Apple will be the incumbent. And we all know that symmetric attacks never work against entrenched incumbents who have all the levers of power at hand to deploy in a withering counter-attack.

Will Apple rule the iPad market?

This question sounds like a tautology. It’s like asking “Will Apple rule the iPod market?” But redundancy has not stopped WSJ journalist Benjamin Pimentel from asking. His answer to the question is below:

But while Apple apparently has the edge in the emerging tablet war, it is unclear if the company will end up dominating the market the way it has come to rule the digital music player market with the iPod.

Gartner’s Fiering said the iPad has “raised the bar and suppliers are now scrambling to make sure they get it right.”

IDC now projects 6 million tablet devices to ship this year, including 4 million iPads, Shim said. But while Apple has taken the lead, he added, the company faces the “burden of lifting or defining this entire new market,” because there are no other competitive devices available.

“In the iPhone market, they learned from everybody else,” he added in a video interview. “In this new space, there’s nobody else to kind of bounce ideas of so to speak.”

But Apple may not have to feel so alone for long.

Fiering specifically pointed to H-P’s as the best positioned challenger, given its scale, reach and its upcoming merger with Palm.

“There are not too many suppliers that can pull all those pieces together,” she said. “H-P could if they integrate the Palm acquisition properly.”

Another IDC analyst, Crawford Del Prete, agreed saying, while the “buzz” from H-P had generally been defensive in relation to the iPad, “the longer term story is far more interesting.”

“Given H-P’s massive scale, I think they have the ability to drive new price points for this kind of product,” he said. “With a lower price point, the category becomes far more interesting.”

via PC Makers Look To Challenge Apple’s IPad – WSJ.com.

Before diving into the statements above it’s worth noting where the journalist went to get opinions to fill his column. He called Gartner and IDC. Quoting industry analysts is a standard operating procedure to fill column-inches with material that does not offend. But how good are they?

In my years of watching those who watch markets I formed a ranking of analyst types and their likely accuracy with respect to prognosticating a market shift. In order from most accurate to least accurate:

1. The most accurate are rank amateurs (deagol, Muller, et. al).  Independent bloggers who do some fact checking tend to make the boldest but most accurate forecasts.
2. The next most accurate are sell-side analysts (purveyors of analyst reports from established brokerages).  They follow financials for individual companies.  You might think their record is quite poor, but in fact they are much better than..
3. Industry analysts (like Gartner, IDC).  Their forecasts and sensitivity to disruption are often off by an order of magnitude.  This is partly because they forecast a bit further out than Wall St. but also because they are closer to their industry clients– the source of their ideas.  They spend a lot of time talking to the least accurate forecasters…
4. The corporate analysts.  They are typically hired to advise management in the incumbent companies. These are people who have the most information about the way the industry is performing on a daily basis.

You might notice a pattern here: the closer you are to the market, the less likely you are to observe how that market is crumbling around you. You cannot see the forest for the trees.

How could this be? How can having more access give you a poorer picture? The answer lies in the asymmetry of a disruptive attack. The more you know about how things are the less you know about how things could be.

In practice, the analyst information value chain works like this:

Corporate analysts feed information to management that management is comfortable digesting. Those managers then hire industry analysts to validate their opinions. Industry analysts are keen to maintain a relationship with those firms and so they listen carefully to the prejudices of their clients. They then hold up a mirror to those myths and consolidate those opinions for wider distribution and quotation by journalists at respectable publications.

Stock analysts listen with one ear to the chatter but with the other to the way the wind blows with the stock market. Sometimes they actually sample the data in the value chain directly by calling acquaintances in the market and hire interns to watch what’s happening in the shops. They then build an opinion that has some level of surprise but that they hope will not stray too far into controversy so that they can keep their jobs in case they are wrong. The safe bet is always to say that things will stay mostly the way they are, but to say it in clever ways.

So that just leaves only one group of analysts with independence from a paycheck who can make an opinion on the basis of facts alone.

This post has become longer than I planned, so I’ll dive into the exact answer to the article claims in part II.

Sony would say No to Walkman today

Sony is “not convinced there is a large enough market to justify bringing out a tablet,”

via Sony Considering Developing Tablet Computer to Compete With Apple’s IPad – Bloomberg.

I wonder what current Sony management would have said when the Walkman would have been presented to them in 1978 by audio-division engineer Nobutoshi Kihara.

The Walkman TPS-L2 from 1979:

The Walkman introduced a change in music listening habits by allowing people to carry music with them.

There was a tiny market for such implements in 1978, promoted to professional journalists.  Sony even had a product called the Pressman and marketed it exclusively to reporters. These recorders lacked stereo sound and were very expensive. They also used (typically) microcassettes, which had no support from record companies.

With the limited choices presented to consumers, the most popular cassette tape players were either home stereos or car players.

I’m sure Sony’s current management  would also have been unconvinced that there was a large enough market to justify bringing out a consumer-grade portable cassette player.

Apple’s product trajectories

In a well written and reasoned essay, John Gruber observes how Apple evolves their products after starting with a perfectly narrow new product definition.

Toward the end he brings us to the iPad saying:

That brings us to the iPad. Initial reaction to it has been polarized, as is so often the case with Apple products. Some say it’s a big iPod touch. Others say it’s the beginning of a revolution in personal computing. As a pundit, I’m supposed to explain how the truth lies somewhere between these two extremes. But I can’t. The iPad really is The Big One: Apple’s reconception of personal computing.

Absolutely right.  The iPad is as big as it gets.

But in my way of thinking, the iPad itself is but a “rolling” of the original iPhone which itself was a “rolling” of the gesture-based UI that they gestated in Apple’s labs for more than five years.  That UI itself was made possible by the modular nature of OS X and the frameworks on top that have their roots in Next Step. Next Step itself owes a lot to Unix which was born in 1968.

via This is how Apple rolls | Tablets | Macworld.

Why Nokia’s board backed the CEO in a stay-the-course strategy

Nokia chairman Jorma Ollila said the company’s management is fully supported by the board

via Nokia board backs CEO, new device strategy | Electronista.

In my assessment of Nokia’s competitive response to the mobile computing disruption I had anticipated an effective re-organziation to begin in 2013, so it came as no surprise that a stay-the-course plan is still being supported at this stage.

This is to be expected because a disruption, by definition, discourages a symmetric response from the incumbents.  Indeed, management would face serious scrutiny and probable dismissal if they did address the challenge head on. A symmetric response would begin with a declaration that the entire asset base of the company is a sunk cost to be written off.  That would include its products, distribution network, development processes, resources and priorities.  Such a response can only come about from a near-death experience.

You can certainly see the dilemma: It would be absurd for management to declare that their top rank position in the mobile phone market is an undesirable situation to be in.  It would be even more absurd if they suggested scrapping their entire world-leading volume business to re-focus on a new business–doing basically what Motorola has done when they were facing oblivion.  The chances are, however, that this is precisely what needs to be done, and the sooner the better.

So being sensible is the path always chosen.  Being bat-shit crazy is not an endorsable strategy.

Essentially, management is paid and incentivized to protect an eroding asset, not to destroy and replace it.

Misdiagnosing Failure: Why Disruptive Innovation Models Miss on Apple

In a thought-provoking article in The Motley Fool (Predicting Failure: Testing the “Disruptive Innovation” Model ) summarizing recent research in disruptive innovation, the following quote jumped out at me:

Then again, the model is dead wrong 15 percent of the time. Lest you think Thurston won’t admit to failures, he points out several instances where his own predictions are wrong. Take the Apple iPhone, he says — if you apply the model to this specific product, instead of the company as a whole. Apple was a new entrant in mobile phones. The iPhone provided better Internet performance and a better interface at a higher cost — not poorer and cheaper — yet it was very successful from the start. “When it’s wrong, it’s interesting,” Thurston says. “We hope to improve the theory.”

This is of particular interest to me because I’ve always felt that Apple had a disruptive track record that was not recognized by disruption theory practitioners.  I think the reason is that casual observers place Apple’s products in narrow categories rather than seeing the real jobs that the products are hired to do.

The reason iPhone gets misdiagnosed by disruption theory is that it is placed alongside other phones and looks sustaining. That’s what the quote above implies and it’s a common mistake. I first did that myself. However a cursory review of how the product is used (see ComScore and Nielsen surveys on usage) shows that it’s used for browsing and applications more than for mobile telephony.  These jobs it’s hired to do have more in common with personal computing. Therefore, when you put an iPhone next to a computer, its disruptive potential becomes clear. This placement also leads you to think of a trajectory that predicts the iPod touch and the iPad as natural improvements for Apple.

That is why I classify the category the iPhone competes in as Mobile Computing–a category of products that is undoubtedly disruptive (less powerful but more convenient and often cheaper) vis-a-vis traditional personal computing.

Similar analyses for the iPad, the iPod would also reveal a pattern of new market disruption for Apple.

On Apple’s Two Monopolies

I argue that Apple now has not one but two monopolies:

I)    A nearly-total monopoly on computer (and pocket computer) systems designed with good taste.
II)  A total monopoly on the Microsoft-free, hassle-free personal computer.

Imagine that every car maker save for Toyota insisted on using the infamous East German Trabant as a standard of quality – yet blindly imitated random elements of Toyota’s visual design.  How long would it take for the whiners to appear on the scene and start making noises about monopolistic tyranny?  How long would it take for Toyota to start living up to these accusations in earnest?  And why should it not do so?  What is to be gained from corporate sainthood? …

Of course, Apple’s competitors cannot actually copy the secret of its greatness, because Apple is a fundamentally different type of organism.  Rather than a brainless government-by-committee, it is an extension of one man’s will, projected with the aid of a small group of trusted lieutenants: no focus groups in sight.  For the Apple-imitators to turn into genuine “Apples” would be as fantastic and unlikely as it would be for a slime mold to spontaneously become a true multicellular animal, equipped with a central nervous system.  It is also unclear that, from their own perspective, they should want to grow brains – for a creature with that kind of centralized point of failure is decidedly no longer immortal.

via Loper OS » Non-Apple’s Mistake.

I’ve always thought that Apple had only non-consumption to compete with.  The non-consumption of hassle-free technology.

On Toys

Don’t be discouraged if what you produce initially is something other people dismiss as a toy. In fact, that’s a good sign. That’s probably why everyone else has been overlooking the idea. The first microcomputers were dismissed as toys. And the first planes, and the first cars. At this point, when someone comes to us with something that users like but that we could envision forum trolls dismissing as a toy, it makes us especially likely to invest.

via Organic Startup Ideas.

On a mobile device Search hasn’t happened

This is one of the most thought provoking things I’ve ever heard.  Some of the implications are unfathomable.  Before we dive into the implications of iAd, here is the exact quote from the Apple Special Event, April 2010 (iPhone 4.0 launch) around 45 minutes in.

When you look at a mobile phone, it’s not like the desktop.

On the desktop, Search is where it’s at.  That’s where the money is.

But on a mobile device Search hasn’t happened. Search is not where it’s at. People aren’t searching on a mobile device like they are on a desktop.

What’s happening is that they’re spending all their time in apps.

When people are looking for a place they want to go out to dinner they’re not searching. They’re going into Yelp. They’re using apps to get the data on the internet rather than a generalized search.

And this is where the opportunity to deliver advertising is.

Not as part of search but as part of apps.

Jobs is making a set of huge claims:

1. There is no search on devices.
2. There is no money in search on devices.
3. Apps create an inventory of billions of ad impressions every day
4. Apps are better at delivering the data from the internet than a browser
5. Apps are therefore the new browsers and eyeball aggregators

This is heavy stuff.  I believe what gives Apple the confidence to make these claims is the vast amount of data on user behavior that the app store collects. It’s possible they’re wrong, but it’s more likely they’re right.

If they’re right, what are the implications?  First, obviously, iAd adds up to a lot of cash « Asymco.  Second, this has dire consequences for Google.  Jobs could not be more blunt: search is not where the money is at.

I can chip in some personal experiences that confirm this preference for apps over browser interfaces, but I leave it as an exercise to the reader.

Palm Minnow is Swimming with Sharks

Palm CEO “I’ve never used an iPhone” Rubinstein quoted in the earnings conference call:

“We had an arrangement with Sprint that when we launched with Sprint that they would invest in marketing and carry the product and for that they would get an exclusive for a period of time. That really determined when we could do our launch at Verizon. I agree with your premise that if we could have launched at Verizon earlier, prior to Droid, that we would have gotten the attention that the Droid got and since I believe that we have a better product, I think we would have even done better.”

So we are led to believe Droid launched into a window in Verizon’s launch schedule. A window which was shut to Palm due to their exclusive with Sprint. It’s a matter of timing.

Then again, Droid got $100 million in advertising and marketing budget from Verizon and Motorola. It’s unlikely that Palm could leverage that kind of muscle, and their product ended up being positioned on a female demographic.

Palm was either late or under-funded or mis-positioned or all of the above.

Essentially, Palm’s problem is not the quality of the product (which is arguable) but their ability to market and distribute in a highly competitive market. In other words, it’s not that they’re not smart enough, but that they’re not strong enough.

Sadly, it’s not enough to be smart or good. They’re in the wrong market if they think having a clever product is a winning strategy. Mobile Computing is the toughest technology market today. Because the stakes are so huge, it’s a market that is targeted by enormous resources.  This is no place for start-ups.

Palm is simply too weak to make it.

Google thinks trying to predict the stock market is illegal

There are many, many things that Google could do, that we chose not to do… One day we had a conversation where we figured we could just try to predict the stock market. And then we decided it was illegal.

link: MacDailyNews

This is so insane that I have to assume he was mis-quoted.

The Below Average CEO: Olli-Pekka Kallasvuo

I vehemently disagree with this premise:

Nokia did not take advantage of any of the opportunities that it had by being in first place. It failed to leverage its partnerships with carriers, manufacturers, software developers, and content companies.

link: The Below Average CEO: Olli-Pekka Kallasvuo Of Nokia (NOK) – 24/7 Wall St.

When disrupted, large incumbents invariably fail to respond adequately to the threat.

You can only blame management if the threat is symmetric and they fail to take up the challenge. This failure almost never happens.

Asymmetric competition is intractable in almost all instances. This failure always happens. A response in kind by management is usually worthy of dismissal “for cause”.

The day the Windows died

I always thought Windows 2000 was the point of over-service for Microsoft. The book linked below puts a date on the point when Microsoft could and should have created an autonomous division whose task would be to create the platform that would eventually disrupt its core business.

Clearly Microsoft did not do this but Apple, with iPad, did.

In September 1999, Kodesh wrote a memo to Gates and Ballmer under the heading “Starting from Scratch.” We need to kill Windows CE for those categories, he argued. Win32 is not an advantage; it’s a tax on device design. It served to further Microsoft’s strategy but not to help consumers. Given all their other alternatives, electronics manufacturers wouldn’t pay the tax. Kodesh wanted to take a small group of developers and work solely on developing the best software for information appliances, unconstrained by the needs of the rest of the company. Gates rejected the suggestions. “It’s very disappointing you feel that way,” he told Kodesh. “We don’t have time to start from scratch.”

link: Who Fatally Wounded Microsoft? It Was Bill Gates. « Mike Cane’s iPad Test