Untitled

Data Movement and the Cloud

http://connectedplanetonline.com/business_services/news/Cisco-Global-data-center-traffic-to-quadruple-by-2015-1129/

In a nutshell, Cisco's surveys of Internet and data traffic usage in recent years have had a simple message. Video. Video. Video. Not suprisingly, video is taking more and more of the traffic on the Internet. It's not a surprise when a music file might run 10 meg, an audiobook might run 100-300 meg., a movie for a portable device might run 1 gig, an SD movie might run 2-3 gig. and an HD movie in the 4 gig. or more range.

But today's report suggests a different insight. Roughly three quarters of data traffic happens within the datacenter. Such a statistic supports Cisco's move into the data center with its UCS product line that combines both blade servers and routing within the data center.

The other insight that over half of data will occur in the cloud is perhaps less interesting, given that cloud computing is used to describe private clouds, public clouds and hybrid clouds.

Crazy about keyboards

People sometimes think I am obsessed with keyboards because I have strong views about them. So, let me put my views up front.

I like good keyboards.

I have always liked Thinkpad/Lenovo keyboards. And I typically use an external keyboard even with a laptop when in my office - the reason: I am a big fan of ergonomic keyboards such as the Microsoft ergonomic keyboard. It's the one with the hump in the middle so your hands are turned slightly up in the center, and even more importantly, it has a raised wrist rest.

Along with my ergonomic keyboards, I like my vertical mouse. It's a traditional mouse rotated 90 degrees so your wrist is not twisted. I learned about it from a programmers whose RSI was so bad, he had to give up programming.

More recently, I have purchased the rather elegant Logitech keyboard for Acer Android tablet. It's not a great keyboard in the sense that the Microsoft ergonomic keyboard is. But it is dramatically better than typing on the glass of a tablet. It's softer on the fingertips. It's faster. And even more importantly, it uses its case as a stand, so suddently you have low cost laptop for taking notes in meetings. Combine the keyboard, the case as stand with a $14 stylus and you have quite a useful little device. In many ways more useful than a tablet.

And because the distance between your torso and the tablet is short, there is little sense of having to over reach with the stylus. The whole combination works well. I even use the stylus on the keyboard and have gotten accustomed to using it my phone when the stylus is easily available.

You can, of course, pick up the tablet and use it with your fingers or the stylus, but those who I have influenced to add these apparently needless accessories (there is also a version for iPad), have had, as I have had, the sudden and unexpected realization of how much more useful they become.

It perhaps also explains the popularity of the ASUS Transformer which combines the form factor of a notebook with the detachable tablet.

How good is TV without a cable subscription?

With lowered disposable income, many Americans are looking at ways of cutting their monthly expenses. Examples include:
1. Substituting Skype for long distance costs.
2. Cancelling land lines and using a cell phone as the only carrier based service.
3. Substituting WiFi whenever possible for 3G services to minimize the use of data plans.
4. Using fixed cost services such as Netflix rather than variable cost rental of movies.
But one important area, as measured by the amount of time, people spend watching TV is the cable bill.
So, over the past two months I have been experimenting with alternative approaches to cable. The big message is that I have been surprised at how little I miss cable TV and how many alternative ways of accessing programming exist.
The most useful services and web sites that I have found are as follows:
1. Hulu.com: upgrading to Hulu Plus gives you access to more TV, but the free service is till invaluable.
2. Netflix.com: at around $8 a month for streaming, it's an absolute bargain. While it does not have everything, it remain a superb value.
3. Over the past year, the major network sites have also become a useful source of free programming: abc.com, cbs.com, fox.com, nbc.com to list just the major sites. While they are a bit erratic in what they make available on-line and their user interface can be sometimes a little confusing, most recent shows can be viewed on demand.
4. Specialty channels:  these vary more widely in their offering, but typically recent shows can be found on sites like KQED.org (e.g. Masterpiece Mystery), and other specialty channels such as syfy.com.
5. Sports is a more difficult area and perhaps the one area that holds back many sports-crazy viewers from cutting the cord. But even here there is hope: ESPN3 provides sports, often delayed relatively to the event by 24 hours.
6. Amazon Prime is probably justifiable if you order goods from Amazon, and so the access to thousands of movies and TV shows is a relative bargain as a result. However, Amazon does tend to duplicate what is available from Netflix and Hulu Plus so the increase in choice is not large.
7. Rentable streamable TV shows from e.g. Amazon or iTunes. I have not found it necessary to pay for shows as the availability from subscription or free resources is so rich.
8. Proxy servers: there are a number of proxy servers that allow you to access shows in other countries, e.g. the UK. These are typically free or low cost services. But typically you have to have a severe addiction to a show you cannot obtain easily in North America. M15, Dr. Who and Torchwood seem to be shows that have inspired their fans to expand their sourcing.
9. A Roku box is a relatively painless way of using WiFi to hook up most Internet delivered shows to your TV, but the most reliable way, better than Roku, tablets, WiFi enabled DVD players remains a general purpose computer hooked up to your TV.
10. I have not tested the usefulness of game players such as Xbox or the Sony Playstation for streaming video yet.
Conclusions
So, the conclusion is that having no cable is no impediment to watching most TV. But you still may have to have a physical DVD rental service on Netflix or at the shrinking number of movie rental stores to see premium programming from HBO. And you will have to wait a season.
Perhaps the biggest challenges is that it is more complex to figure out where and when a show is available, given the leads and lags, and changing policies of networks. For that a service such as Clicker.com becomes useful.

Ultrabooks and the Shifting Value Added in Laptops

The most interesting thing about an ultrabook is not that it will finally provide an instant on feature - matching the major advantage of a tablet. What I find particularly interesting is that an ultrabook's value added profile looks very different than past laptops.

Consider the following costs:

Intel has three processors commonly used in the latest processors: the Core i3, i5 and i7. The least expensive versions of these processors are listed at $127, $184 and $294 as of November 14, 2011.
(http://files.shareholder.com/downloads/INTC/1531543009x0x517569/A19EA566-3E97-43C9-B73C-66BBE6F438F2/Nov_14_11_Recommended_Customer_Price_List.pdf). While there exist faster processors, there's a good argument that putting your money into a solid state drive or SSD will produce better performance for most people.

Ultrabooks are specified to have an instant on capability. While hybrid SSDs can be used to cache regular hard drives to lower the cost of instant on capabilities, the evolution is towards pure SSD devices. If we take a typical SSD sold today as likely in the 120 gigabyte range, we have the interesting situation that the cost of an Intel SSD is around $295. And of course, if you try to match a more typical storage capacity of laptop, you can easily spend $550 to get the storage up to 300 gigabyte.

Now clearly, the price of ultrabooks has to come down for them to more attractive to buyers, but we can expect a classic experience curve to drive costs down.

In other words, while the world sees Intel as a microprocessor company, in terms of value added, Intel has moved to capture even more value in the storage subsystem at least in the leading edge category of ultrabooks.

Now, traditional hard drives are not going to disappear. On a cost per gigabyte basis SSDs cannot compete with traditional hard drives. But given that Intel has had a hard time of diversification in the past, it's interesting to see how they are attempting capture more value in laptops.

And of course, AMD has been going down the same road of increasing its value added and share of components with its purchase of the graphics company ATI.

As usual in tight margin businesses, vertical integration looks attractive.

A Cool Steampunk App for the iPhone

Yesterday, I downloaded one of the coolest apps for my iPhone. The 99 cent Farnsworth communicator app provides a 19th century interface on a video communicator. Right now it only provides video and audio messaging, not video communications as the characters in the show, Warehouse 13 obtain.

Perhaps the coolest part is the notification. It seems the antithesis of sounds chosen by modern phones.

Best of Times or Worst of Times for Starting a Business?

Best of Times or Worst of Times for Starting a Business?

In a down economy with high unemployment, many managers are tempted to consider a startup. The current environment is both the best of time and the worst of times for starting a business.

Conventional  wisdom on what constitutes a good startup abounds in Silicon Valley, but some insights about what is likely to work require taking a larger and perhaps longer view of success in business. Let’s start however, with some examples of current conventional wisdom. It’s not a comprehensive startup checklist, but it does cover some highlights.

Example Conventional Wisdom

• Businesses started in tough times do better than those in a boom. (An observation made by many people)
• Semiconductor businesses are too expensive and have low success rates. (Many Silicon Valley venture capital firms have closed down their semiconductor investment groups)
• Internet based businesses are attractive because they have low startup costs. (Frequent venture capital observation)
•  Putting businesses on the Internet that automate previously more labor intensive businesses is a low risk strategy. (Typical venture capital observation)
•  Avoid businesses that large players such as Google, Apple, Microsoft, etc. can integrate easily into. (Often phrased as a complaint that large companies are killing innovation because of their patent portfolio or pattern of vertical integration)
•  Venture capitalists are a pain in the neck and actually add little value, so avoid raising money if you can. (A invariable complaint of many entrepreneurs)
•  Manufacturing is impossible in the US. (A widely held assumption)
•  If I don’t have a business model, advertising will support my web site. (Frequently heard idea from startups)
•  My idea for a business is unlikely to be simultaneously invented by other entrepreneurs. (Competitive analysis is typically weak with most startups and even worse, parallel startups may have low or no visibility)
•  Starting a business is lower cost than it used to be because of all the open source and free software that is available. (An observation made most commonly by technically oriented founders who downplay the need for marketing, sales and partner development)
•  Bright and inexperienced managers are the only managers worth considering.  (Consider Google.)
•  Content is king and all content has value. (The idea of “long tail” content is that the Internet provides a method for monetizing less popular or low demand content)

As with any conventional wisdom, while there may be grains of truth in such observations, the reality is that gross generalizations are almost always useless. Some people refer to them as a 40,000 foot view of problem. Strategic analysis of an industry or a company is almost always inadequate; one must look at individual opportunities at the level of a product, service, segment or business model (how one makes money).

But macro trends do matter. In starting a business, an entrepreneur needs to be aware of the gross assumptions floating around the business environment, the business zeitgeist. In Silicon Valley, there are some large and often unquestioned assumptions floating around. Understanding these assumption may allow an entrepreneur to “Think Different” about a problem and reduce the probability of direct competition. And reducing the probability of having to compete with lots of competitors is a strong basis for a good strategy. In the past six months, I am continually surprised at how many innovations are being simultaneously invented by diverse people in different locations. It’s a little like the invention of television or the phone, both invented by multiple people at roughly the same time.

Some Useful Observations For Innovators Starting a Business

Supply and Demand

We are still at a very early stage of the digital revolution.  As a result, many of the lessons learned by early innovators are less appropriate today. For example in the early days of the personal computer, there was remarkably little software.  Today, the problem is that for any product category there is often an overwhelmingly wide variety of choice. And not only is there choice, offering vary in their business model. Consider productivity software. You can purchase the leading product category offering, Microsoft Office in multiple versions including a low cost educational version that is available even if you are not a student. Open Office and Libre Office offer free equivalents with only small penalties. Cloud based offerings are available from both Microsoft and  Google and a host of smaller players. 

The key insight is that having a good product is a whole lot different in an environment of scarce software  than it is an environment with multiple offering and multiple business models.

Content Availability and Distribution

As with software, the environment for content is now transformed as well. In the early years of the digital revolution, content was rarely available on the Internet. 

TV programming was hard to obtain and the schedule determined by the network, cable company or satellite company. Today, content is everywhere. Video content is available by subscription, by rental, by purchase, via broadcast transmissions, cable, cable on demand, cable Pay-TV, Internet delivery, physical rental. Again, the equation between supply and demand has altered in favor of the user. And if greater access, more business models and more methods of delivery were not enough, consumer created video represents a whole new category for consuming time.

The same is true for music. Offerings from iTunes, Amazon, Rhapsody, Spotify, Slacker, Pandora, traditional broadcast radio, Internet delivered radio, satellite radio, etc. provide an overwhelming set of choices that did not exist before.

Written content availability is even more diverse today. In a previous generation, few people had access to more than their local paper and the odd national newspaper. The Wall Street Journal, USA Today and the New York Times were typically the only daily newspapers with national reach. Today, a heavy consumer of news can draw upon a range of news sources that would have been impossible without the Internet.

The key insight with content is that the structure of the traditional news gathering industry is unsustainable when supply increases.

Technology Assumptions

Much of Silicon Valley is built on the assumption that the cost of technology will continue to decline. Moore’s Law is used to describe the observation that the number of transistors in a processor doubles every 18-24 months or so. Similar cost curves are seen in other areas of technology such as hard drives, telecom costs, screens, and software tools.

When the cost of a technology keeps dropping, four things happen. 

• First, it is hard to maintain a traditional business model where service is incorporated into the price for free. In some cases, the profitability is so low that sales costs are no longer affordable – which explains the trend towards freemium models, where initial use is free. Make the trial free to reduce the sales cost. You only pay when you reach some threshold of use or activity. Historically when you bought expensive mainframes from IBM, you received lots of service. The amount of free service declined as the cost of computers dropped. The same phenomenon exists with software. Expensive software is more likely to have paid or free support. In contrast, getting support out of Google on their free offerings is a little like looking for hen’s teeth.
• Second, companies need to increase the performance and scope if their offering in order to maintain their profitability. An MP3 player such an iPod may be profitable, but a smart phone which generates several thousand dollars of service revenues is a lot more attractive. Investment in these sustaining innovations represents the past road to success for many product categories.
• Third, companies will tend to over-service customers leaving room for disruptive less capable products and services. Using a netbook, tablet or smart phone for interacting with the Internet provide clear examples of usage where the less capable technology is more convenient, more affordable or merely sufficient. The lower cost of these disruptive technologies will often open up a new group of users that previously would not have been able to afford the offering.
• Fourth, when margins get compressed, vertical integration occurs. Amazon’s launch of its Fire tablet demonstrates this principle. Estimates of Amazon’s manufacturing cost vary between $150 and slightly over $200, but it hardly matters any more to Amazon that the cost of the razor does to Gillette. Both companies look at multi-period profitability and the revenues generated by the initial sale.

The key insight here is that traditional views of business profitability – single period profitability and individual product profitability often are less important that relationship profitability over multiple periods. This is something well understood in financial services where sophisticated banks and credit unions look at relationship profitability. They promote products based upon their ability to bring in relationships that will be gateway products.  It’s a bit like the heroin distribution business. The initial product use leads to more sales.

One implication of this insight is that it increases the amount of capital needed to build a business based upon multi-period profitability. The challenge is that venture capital firms like to keep their investees on a short leash. With wrong venture capital investment group, a startup runs the risk of being put out of business because of the need to iterate the strategy or the time required for frequent fund raising. And with some venture capitalists having difficulty in fund raising themselves, these “short leash” funding strategies can be even more risky than they initially appear.

So What’s the Good News? Why is it the Best of Times?

There is good news.

The first piece of good news is that with the current high rate of unemployment and generally depressed state of the economy, businesses that think differently about how to offer value demonstrate tremendous success.

Fix Customer Costs

Consider Netflix. Netflix is an extremely clever company that understood before anyone else that there is an effective limit to the amount of time that people can afford to spend renting movies. By offering a fixed price arrangement, they create value for customers by fixing their monthly cost. In contrast, many airlines seem to have an innovation department designed to make the cost of flying unpredictable.

The conclusion: customers like businesses where there is no pricing surprise. Competing against a competitor that does not recognize this customer need is likely to be a productive strategy.

Offer Synergistic and Multiple Value Propositions

Consider smart phones. Smart phones, as a product category,  offer a consumer multiple benefits. They are a music player, cell phone, video playback device, still and video camera, low end computer, email device, Internet device, GPS device.

The conclusion: offering multiple values can increase the perceived value of a product and service offering. In the same way that Microsoft offered a bundled productivity package MS-Office, a cell phone is not a cheap purchase, but the cost per piece of functionality is lower than the purchase of individual components.

Simplify Choice and Pricing

Consider pricing. Pricing is a complicated area in most companies. It’s an area where many people have input. There is almost never one person accountable. Pricing specialists vie with the VP Sales, VP Marketing and CFO for influence. What distinguishes a wildly successful company such as Apple is the clarity of its pricing. It’s hard to identify another company that has maintained consistency of pricing clarity over a changing product line. Many have observed that Apple typically offered three prices in the market so that customers were not cognitively confused about their choices. If for example, you wish buy an iPad you face only two decisions: 

1.       Do I want the option of 3G so I connect when outside my home or office?
2.       How much memory do I wish to pay for? 16, 32 or 64 gig?

In a sense you can see these pricing options as influenced by software interaction design. Good software design typically reduces the number of choices that a user must make and it is typically goal oriented. When you have this limited palette of choices, you are more likely to buy and less likely to worry that you are making a sub-optimal decision. In the smart phone area, Apple’s limited choices make selection of an iPhone far easier cognitively than the bewildering array of Android phones.

In the same way, curated applications on the iPhone platform contrast dramatically with the lower level of quality control on Android apps, where malware has been more of a problem. 

The conclusion: your pricing model can change perceptions and adoption of your product. While pricing may not be sufficient if you have a poor product, having a good product with confusing pricing is a recipe for failure.

Shamelessly Exploit Your Competitors and Their Investment in Technology

Most engineering based startups put most of their initial capital into product development.  While to some extent, this is an understandable approach, it is often not the most effective method of learning about customers and growing a business.

Learning about what customers really value and will pay for is critical. Bob Cooper’s research on new product development success rates suggests three important conclusions:

1.  The strongest predictor of new product success is offering a differentiated high value product.
2.  Value is not homogenous and varies by segment of the market and also by the objectives of the user.
3.  The most common cause of new product failure is inadequate market research and understanding of customer needs.

The conclusion: the upside of the wide availability of products and services is that a startup can choose to license, resell or repackage technology that has been already developed. Honda distributed an SUV by Suzuki as a way of both filling a whole in its product line and learning about the SUV market. The same redistribution option is often an attractive way of learning more about customers and their needs.

This strategy is often an excellent way of entering a market and reducing capital costs. Perhaps even more importantly, it allows the investment of scarce capital into marketing, promotion and sales. And with a track record of customers and revenues, it may be easier to raise money from angel investors and venture capital firms. Even better, if the innovations developed build upon the initial resale relationship, there may be an opportunity to turn a supplier into a distributor.

Some Companies with Platform Strategies Can Be Supportive to Some Small Businesses

Innovation often takes two forms: product innovation and platform innovation. Platform innovation requires the development of partnering relationships with other companies, who must develop applications to run on the platform.

Nokia got into trouble because it generally built superb hardware devices but was weaker on its platform strategy and was forced to ally with Microsoft to catch up with Apple and Android. Companies that offer dedicated devices will increasingly find it hard to compete against more general purpose platforms where software functionality can replace a dedicated device such as a remote at much lower cost. Sonos, the well designed wireless music system offers a remote for its music systems but recognizing the proliferation of iTouches and smart phones also offers a free remote application on the iPhone as does the video streaming box manufacturer Roku.

HP’s recent announcements about its tablet offering demonstrates the importance of having a supporting ecosystem for a platform strategy. If you have a platform strategy, you need to put in place programs to encourage or incent potential partners to adopt your platform.  Without an ecosystem strategy, even the best product is unlikely to succeed.

Ecosystem developers need to ensure that their environment remains attractive. Apple’s current 30% distribution fee is increasingly forcing its ecosystem to develop non-native applications that are browser based to avoid its distribution fees and will over the longer term weaken Apple’s hold on its developers.

The conclusion: large companies need partners to make their ecosystem work. A small company should shamelessly exploit this need and demand significant incentives and help from a late developer of an ecosystem. The availability of cross platform development tools and approaches can also provide greater customer reach.

Marketing Matters and Makes a Difference in Creating Successful Startups

Above all, the biggest opportunity is to remember that marketing matters. It makes a difference. There are at least five reasons why companies should invest in marketing:

First,  understanding your customers leads to better design of a product or service.  Obtaining ongoing customer feedback quickly allows for more rapid iterative improvement.

Second, while building general purpose products would seem to make sense from a product development perspective, customers look for ease of use and solutions that match their needs. Nailing down what customers need and delivering what they need means taking a general purpose product and ensuring it solves the customer problem.

Third, benefits and positioning need to be tailored to specific types of adopters. RIM has been very successful in the enterprise space because it tailored its features (security, bandwidth, central management) to the needs of IT departments managing email to mobile users. Its less successful tablet launch appeared designed for corporate users but was marketed as being appropriate for any user.

Fourth, what customers, prosumers, reviewers and other media report about your product or service is part of the “value” of the product.

Fifth, those who design products understand them too well. They lose their ability to take an outside-in or customer view of the problem. Product designers and developers typically focus on relatively obscure features without quantifying the key benefits the customer may care about. 

Perhaps the most important reason that marketing matters is that in an environment with many competitors, spending money on letting your customer know that your product exists creates more revenues for you than for competitors who don’t let customers know that they exist. Product leadership is not just about who has the best product, it also involves reaching customers.

A Contrarian Strategy for HP

With a new CEO at HP, there is much discussion over the strategy of whether or not to spin out or sell the personal computer division of HP.

My thought is that the focus of the question is wrong. HP essentially has three businesses: enterprise products and services, the PC business and printing.

For years, printing and the resulting ink business has been a major profit center for HP. Its brand is strong and the business is a classic razor and razor blade business - an annuity.

If HP were to sell a business, most people would tend to focus on which of the three businesses has higher margins and growth rates. But the other way of looking at the business is to ask the question, where can the business provide opportunities for growth and innovation.

Rating the businesses on room for innovation, it becomes pretty clear that the PC business is far more interesting than the printer business. Name a major innovation in printing that is likely to affect the overall revenue and profit growth -- it's pretty hard. In fact, the trend towards web sites, tablets, smart phones and other devices probably reduces the importance of printing for most users.

In contrast, the emergence of the phone business, tablets, game devices, home automation products all show how the notion of digital intelligent devices continues to provide opportunities for profitable innovation in adjacent and emerging markets.

Apple, sitting on $70B or so of cash, is living proof of the opportunities. In contrast, printer businesses are not taking the world by storm.

So, if HP is constrained by absence of capital, selling the printer business is likely to be a far better strategic move that selling the personal computer division.

High tech companies need to continually refresh their product and service offerings. A reliable printer business, a sense, reduces the pressure on HP managers to innovate. Having more capital and smart engineers might well unleash a series of exciting new businesses.

A Sideways Look at Apple and its Strategies

Introduction

The death of Steve Jobs has caused an outpouring of commentary about his role at Apple. Most stories focus on his design skills, secrecy, showmanship, willingness to drop old products, project management and high level of product management centralization. But there is another way of looking at Apple that reveals facets of Apple’s strategy that are less discussed and which reveals some ways of succeeding not often written about. Six strategies appear less recognized and even if recognized, less imitated:

1. The role of accidental advantage
2. Constructed synergies
3. Price simplification based on principles of good user interface design
4. Software being more important than hardware
5. Scale economies and supplier preemption
6. The importance of active PR management and control

Accidental Advantage

One of the most missed observations about Apple is that its success in developing a digital music business was the result of Apple’s failure in the 1990s as a computer company. Record companies were almost destroyed by the emergence of illegal downloading sites such as Napster. Shell-shocked by the loss of revenues, companies were extremely reluctant to enable downloading of their music for fear that their revenues would be ruined by theft.

And along comes Apple, a marginal player in the computer business in the 1990s with a history of customer lock in. Apple’s walled garden and appliance-oriented computers combined with copy protection (referred to as digital rights management or DRM) provided a low risk ecosystem within which illegal downloading was less likely to be a problem. The record companies need for protection of their assets and revenue model could be addressed by an unsuccessful company such as the Apple of that period more easily than a more successful company such as Microsoft.

Apple built a music business because it had failed to become dominant as a computer company and because it had a small ecosystem.

Constructed Synergies and Leverage

Many companies discover great strategies accidentally. 

Honda is widely cited as having accidentally discovered that its low powered bikes were appealing to Americans. 

Perhaps less well known is the success of Deloitte. Deloitte has historically been quite conservative and slow moving. So it was no surprise to many that Deloitte was the last of accounting firms to think about divesting their consulting arm under the name Braxton. Deloitte changed its mind at the last minute, when it realized to its great surprise that as the last firm with an integrated audit/consulting offering offered a unique positioning opportunity. Because of Sarbanes-Oxley legislation, an audit firm may not offer consulting services to avoid any conflict of interest. That was why other firm spun off their consulting arms. In effect, Deloitte constructed a new business model out of its core business audit/financial consulting and a business that they had intended to spin out.

But Deloitte realized shortly before the spin out that for the 80% of the market that it did not audit, owning both accounting and consulting capabilities gave it an integrated capability its competitors would lack. For the 20% of the market that it audited, it would just forego the consulting opportunities.

Apple’s constructed advantage turned out to be equally as important.  Steve Job’s investment in Pixar, with its amazing track record of animated movie success, provided Apple with leverage that he used to gain access to one of the most important video content providers, Disney. With Disney on board, he could improve the iTunes offering and attract other video content owners. It’s unlikely that this constructed advantage was planned, but Apple and its CEO were smart enough to construct an advantage out of these disparate assets.

User Interface Design Influencing Pricing and Product Portfolio Choice

Pricing is a complicated area in most companies. It’s an area where many people have input. There is almost never one person accountable. Pricing specialists vie with the VP Sales, VP Marketing and CFO for influence.

What distinguishes Apple is the clarity of its pricing. It’s hard to identify another company that has maintained consistency of pricing clarity over such a rapidly changing product line. Many have observed that Apple typically offered three prices in the market so that customers were not cognitively confused about their choices. If for example, you wish buy an iPad you face only two decisions:

1. Do I want the option of 3G so I connect when outside my home or office?
2. How much memory do I wish to pay for? 16, 32 or 64 gig?

In a sense you can see these pricing options as influenced by software interaction design. Good software design typically reduces the number of choices that a user must make and it is typically goal oriented. When you have this limited palette of choices, you are more likely to buy and less likely to worry that you are making a sub-optimal decision. In the smart phone area, Apple’s limited choices make selection of an iPhone far easier cognitively than the bewildering array of Android phones.

In the same way, curated applications on the iPhone platform contrast dramatically with the lower level of quality control on Android apps, where malware has been more of a problem.

Software Not Hardware

While Apple hardware has always been praised for its industrial design, in reality the key insight of Apple over the years has been consistent: software is more important than hardware. Hardware and good design provide the skeleton, but the meat is always in the software. And software always makes iterative improvement easier and faster.   

This view may seem controversial as Apple hardware is widely praised, but consider the recent unsuccessful launch of the RIM Playbook tablet. Its performance has been criticized for being buggy and missing expected functionality such as non-RIM email.  Good hardware and an excellent QNX operating system are insufficient if the software does not work well or provide the right functionality. Just as importantly strategic schizophrenia at RIM over whether the Playbook was a consumer or business product led to messaging confusing.

In contrast consider the following four comparisons that demonstrate Apple’s consistent use of software over hardware:

	Hardware emphasis	Apple emphasis
Keyboards	MS-DOS and Windows PCs have function keys	Functionality provided via soft and changeable menu and icon options on screen
Music playing	Traditional MP3 players typically provided control buttons for e.g. play, rewind, fast forward, go to beginning, go to end	Touchscreen interaction on iPhone, and iPod Touch not only matched existing hardware functionality but permitted new functionality such as web browsing or more generally apps
Operating system	Most hardware vendors separate the operating system from applications.	Apple provides both the operating system and much of the Pareto functional software, i.e. the software that provides most of the value for the purchaser
Integration across devices	Generally weak for most vendors. Many rely on simple copying of files.	Apple attempts to make the integration a central point of its offering via e.g. iTunes or its more recent iCloud offering.

Costs and Supplier Preemption

For those outside of the consumer electronics area, one aspect of Apple strategy is almost invisible: its procurement strategy. Over the years, Apple has pursued a strategy of locking up scarce components by committing to large purchases. With a high rate of product launch success, Apple’s commitment is lower risk than for other companies. And by preempting key scarce components, it reduces the likelihood of competitor products succeeding.

Success of the iPod was aided by Apple making large purchases of small hard drives and later flash memory. Advance purchases of the “retina” screen for the iPhone gave it significant advantage over competitors. And its massive success with the iPad gave it a procurement advantage there as well, making it difficult for competitors to match Apple’s costs and marketing budgets or obtain access to key suppliers.

Another aspect of its procurement strategy is that Apple is reported to assess the components of its value chain in one of five categories of strategic importance. The most important elements are preserved in-house.

Today, these critical areas seem to include: hardware design, operating system, content sales and integration, mobile microprocessor design and voice recognition. Critical components that Apple cannot or chooses not to possess are controlled by preemptive procurement. In contrast, commodity or novel innovations are sourced externally. When an external innovation becomes a source of competitive advantage or provides a new set of capabilities it may end up being brought in house as has happened with the music service Lala.com, mobile chip design capability and SIRI voice processing.

The Impact of Regis McKenna Upon Apple

Regis McKenna, a public relations specialist was an early influence upon Apple. He has suggested in his writings that information about a company becomes part of the attributes of products offered by the company. This is a lesson that appears deeply ingrained within Apple. It accounts for the secrecy and the centralization of disclosure at the firm. It is also a lesson that many other company do not seem to appreciate today, thirty odd years after Regis wrote about it. HP’s recent announcement about its cancellation of its tablet offering and the spin out or sale of its PC division is in marked contrast to Apple’s approach to public relations and marketing messaging. HP’s mishandling of the announcement led the board to fire its CEO suggesting that they belatedly recognized the problem.

Taking a Bite Out of Apple: What Apple Tends to Get Wrong

Like any company, Apple has its strengths and weaknesses. Historically, Apple has been far less successful in building significant ecosystems around its platforms. Microsoft, often criticized for being less ruthless than Apple in discarding past technologies goes unrecognized by many for its success in building the most diverse and comprehensive computer platform and ecosystem in history. Apple has rarely been successful in marketing to businesses because when ever faced with a choice of building the next best appliance or developing its ecosystem, Apple always chooses the next best appliance at the cost of its relationship with partners in its ecosystem.

And while the app market for iPhones is large and diverse today, the loyalty of apps developers to Apple is based more upon the size of the installed base than any desire to be loyal to Apple. Practically all software developers prefer multi-platform development approaches which permit them to deliver on multiple phone operating systems (e.g. Android, Windows Phone 7 and Apple). And Apple’s pricing model, where it takes 30% or revenues actively discourages the development of native apps that only run on the iPhone. It encourages the development of browser based applications and certainly must have influenced Amazon’s decision to enter the tablet business.

Summary

Apple is a fascinating company and one that is much written about, a strange irony given its high level of secrecy. Some aspects of its strategies are stunningly obvious (design, integration, ease of use, product simplicity). Others such as those described here require more teasing out to appreciate and provide useful examples of superb strategy design and execution.

Bingeing: a new media pattern

The first time it happened to me was "Six Feet Under". For three days, I was glued to the TV. I think my eyes became square or at least oblong.

I was reminded of this bingeing recently when I read a review on Hulu by a subscriber who claimed to have spent thirty continuous hours watching the entire first season of a TV show named "Cover Me".

It's a guilty secret, not often shared in public, but the availability of full seasons of TV shows offers new ways of watching TV. And the experience of watching a full season changes the way in which plots, character development, repetition and plot reviews are experienced.

Personally, I found the first season of West Wing almost unwatchable because of commercial interruptions. But when viewed without commercials, the series represents some of the best TV writing and acting ever put on television. I have watched the entire series twice. It's certainly one of my favorites, but only without commercials. When a show is this good, almost Shakespearian in its range, advertisements just don't work. Imagine Hamlet with soliloquies interrupted by advertisements. It just does not work.

I have my list of past binges. They include "The Wire", "True Blood", "Six Feet Under", "Dead Like Me", "Slings and Arrows", "MI5" to name just a few.

What does this mean for content developers? Perhaps that there is a emerging and strong appetite for long form drama where characters evolve and are transformed, perhaps even where main characters are regularly killed off, as happens so frequently and surprisingly to Americans in BBC dramas. The traditional advertising influenced plot structure of many TV dramas seems less compelling after the longer form dramas.

People underestimate change. Long form drama seems the opposite of our world today where people are described as having short attention spans.

Disruption and 4G

Reading a review of a 4G smartphone today in USA Today, http://www.usatoday.com/tech/products/story/2011-09-07/Droid-Bionic-finally-lands-and-its-a-winner/50296122/1, I was struck again by the strange nature of smartphone reviews.

The conventional wisdom is pretty standard. More features, faster speed, bigger screens are all desirable.

But unless you are grandfathered into an unlimited data plan, the merits of 4G for you as a consumer are somewhat questionable. Video and to a lesser extent music eat up the standard consumer 2 gigabyte plans very quickly. 4G makes a phone more responsive yes, but it also makes it easier to use up your entire allowance.

Only to the extent that that the IP technology of 4G increases the capacity of cell sites and delivers better service does it really provide significant value for most consumers and such a benefit is not likely to be immediate.

My guess is that 4G has much more value for the mobile user of tablets and laptops. And some people may end up substituting a mobile data plan for a fixed data plan, if and only if they have an unlimited plan (as is currently available on Sprint's Wimax network) or if an employer is paying.

Given current pricing models and capacity limitations, my guess is that it makes little sense to upgrade a phone to obtain 4G capabilities for most people in the short term. If 4G does not cost extra, then by all means buy a phone that includes the capability. Supporting this view is the speculation that the iPhone 5 will not include 4G.

For many consumers, a classic overservicing of needs may be occurring. The performance improvement of 4G may be exceeding the needs of many users, particularly those who don't use their phone as their primary data device.

The Cloud Opportunity for Storage

Executive Summary

Strategic analysis suggests that in the maturing hard drive manufacturing business, there is a significant and strategically critical opportunity for hard drive manufacturers to integrate forward into services for both the consumer and business markets while simultaneously offering outsourced storage management and service for businesses offering cloud storage.

A major advantage of offering a cloud based back up service to consumers is the annuity-like nature of the revenue stream. And because hard drives can be bundled with an optional or prepaid service offering, sales costs of associated back-up services are likely to be lower. A $100 hard drive with hard won profitability can be converted to an upfront purchase plus an annual service revenue that could run in the $10-40 range. Alternative revenue models might include an annual service based pricing model with an on-site hard drive as part of the service offering, in other words charge for service and give away a hard drive.

Incremental revenues from hard drive restoration represent an additional opportunity.

Introduction

One thing is obvious about storage. Most consumers can’t tell the difference between storage offerings. In other words, it’s a classic commodity business where the most effective producer will win.

But as industries mature, companies need to reexamine their value proposition and see whether the business model has or could change. What are the adjacent businesses that represent a low risk opportunity to add revenues, but more importantly are sufficiently complementary to create a differentiated advantage.

With consolidation having already occurred in the hard drive business and two dominant players remaining, Western Digital and Seagate, how might the future evolve?

One alternative would be to accept the carving up of the market. Competition between WDC and Seagate would be comparable to the classic end game in many markets where two dominant players squeeze out other smaller competitors. Coke and Pepsi come to mind. Apple IOS and Google Android. Windows and LINUX.

But there are alternative evolutionary models that could emerge. One traditional weakness of Silicon Valley companies is that they tend to be product oriented. They often are uncomfortable with services and solutions. But as products become more mainstream, businesses often wish to outsource; consumers on average become less knowledgeable than the initial adopters. Another driving issue is that as markets become more competitive, vertical integration often presents advantages. For example, in the highly competitive computer business, the current success story, Apple, has vertically integrated to create an ecosystem that includes content ownership (Steve Jobs’ ownership position in Disney as a result of the sale of Pixar), on line and physical retailing, devices (Macs, iPads, iPhones, iPods) and services (MobileMe, cloud services). This approach is a far cry from the traditional horizontal model where the PC industry consisted of horizontal competitors (Intel in processors, Microsoft in operating systems, Microsoft in productivity software, WDC and Seagate in hard drives, Sandisk and Samsung in flash memory).

One way of looking at the problem is a task oriented approach. A hard drive vendor is not selling hard drives, rather it is selling a solution to a particular problem.

For example, most computer users have been faced with the problem of their system becoming unreliable and needing to restore their system to the previous successful state. While Windows provides the ability to roll back the operating system to a previous version, the comprehensiveness of the roll back is less than having a snapshot of the full hard drive so that it can be restored. This restoration is no trivial problem particularly for heavy users of PCs who many have dozens of pieces of software to reinstall. Reinstalling software on a machine can take several days, a costly exercise for an individual and even more costly for organizations with multiple employees unless they have set up facilities for automating backup and restoration.

A second example is music. An avid music collector may have 20,000 pieces of music. Replacement might well cost $20,000. And while additional hard drives are inexpensive, back up tends to be unreliable and recent material gets missed. Mindless and consistently reliable back up has value to protect the value of the investment.

A third example is memorabilia. Digital photos can easily be lost with a high emotional cost to an individual.

A fourth example is record keeping. Even individuals today often find their financial records stored on unreliably backed up computers.

Cloud Storage

Clearly, cloud storage is an area that is being targeted by many companies. Amazon, Apple, Google, Microsoft, Adobe, just to name a few of the more visible companies are offering free or relatively low cost storage. The intent in most cases is lock-in of the customer relationship as part of an overarching product or in some cases services and advertising strategy.

It’s easy to predict that price pressures in this market will be extreme, leading to efforts by the cloud storage offerors to reduce their costs. But as in all areas of IT, it is the total cost of ownership (TCO) that matters. One way of reducing their TCO will be to outsource storage to the low cost producer. And the most capable manufacturer of hard drives is likely to be well positioned to vertically integrate and offer outsourced storage to these large players. A secondary advantage of vertical integration for a manufacturer is the resulting increased production volume.

If a hard drive manufacturer integrates forward into services, it will lower its manufacturing costs. As the two dominant vendors in hard drive manufacturing operate with low margins, it takes a significant effort to increase the volume and thereby improve or maintain margins. Vertical integration represents a significant opportunity with likely first mover advantages.

The outsourced storage option can be structured in several ways. For large cloud operators, the outsourcing might involve management of in-house storage. For other businesses and consumers, a more traditional cloud storage services model would work. There would also be opportunities for premium storage with additional security attached.

First Mover Advantage

Hard drive manufacturers are highly specialized organizations with value chains that normally ignore service opportunities. Adding the capabilities needed for forward vertical integration requires new focus, new skills and new management. But accepting the opportunity, understanding that services will drive additional volume means that these skills need to be added.

The first to adopt this strategy will quickly gain additional volume. Additional volume lowers costs and makes the forward vertical integration more profitable or enables faster acquisition of downstream customers. It is, as is normal in learning curve businesses, a competitive advantage goes to those who move quickly. What is perhaps less obvious is that the slower the rate of cost improvement, the more necessary it is to seek innovative ways to increase the cost advantage.

Does Downside Exist?

At first thought, pursuing vertical integration might seem to run the risk of alienating large buyers who are already offering cloud services. But if the storage offering is positioned as being available to cloud services and lowering their costs in addition to being available as a consumer service, the cost advantage should be compelling. Owning and managing the storage at a company site also offers a way of capturing hardware volume and minimizing communications costs.

The company that is probably the largest risk is Google. Their use of a proprietary file system and in-house assembly of servers means that they are likely to be most resistant to outsourcing management of storage.

Resource Allocation and Innovation at HP

HP’s recent decision to sell or spin off its low margin PC business represents a classic problem in strategy to which there are different points of views.

Option 1: Sell the Dogs

In the early years of modern business strategy (the 60s and 70s), the conventional wisdom was to perform a portfolio analysis and analyze the characteristic of your portfolio of opportunities. A common characteristic of such portfolio models, made popular by BCG and McKinsey was the decision to sell off the “dogs” in the portfolio. The dogs were typically characterized as low or negative growth businesses with poor profitability or cash flow.

Option 2: Rejuvenate the Dogs

Over the years, portfolio analysis has leaned away from this first generation view of portfolios and encompassed the idea that mature businesses can be rejuvenated and transformed into more profitable businesses through innovation, increased value added, new business models, tackling untapped adjacent markets, or through expansion into adjacent businesses.

Many have criticized the HP decision to move more in the direction of a services business and imitate the move IBM made earlier away from its personal computer business to a services and solution orientation.

The Value of News About a Company

Others have criticized HP for the clumsy and value destroying way in which it announced its decision to exit the PC, tablet and mobile business. As Regis McKenna, PR guru to Steve Jobs and Apple board member has pointed out in his writings, news about a company is as much part of a product and the perception of its brand and ecosystem value as is product information. This is clearly a lesson that HP has not understood as well as Apple.

But the decision to focus on corporate services rather having two lines of business one focused around business and the other around consumer technology and services shows the importance of thinking about the future, values and vision.

It’s pretty hard to imagine an HP that does not attempt to compete with IBM by offering services and solutions. The EDS acquisition was clearly part of that strategy.

Adjacent and Downstream Innovation

What surprised me personally was that HP would walk away from the products of the digital household. I have two reasons for being surprised:

First, increasingly product innovations for business are born in the consumer sector, where consumers often adopt technologies more quickly than businesses. Businesses are constrained by issues of standardization, support and security. By nature they are often more conservative in their adoption. CD-ROM drives, smartphones and Skype all represent examples of technologies adopted much earlier by consumers. Without a presence in the consumer end of the market, HP will miss many trends.

Second, the consumption of digital devices in the home is likely to be a large and growing area that will encompass many areas outside of HP’s traditional strengths in printers and PCs. There are many dollars at stake. Yes, the barriers to entry are lower and there are many consumer electronics competitors that HP would had to have faced, but the need to develop the design and user interface skills that Apple has demonstrated so ably would have been a significant benefit to HP in all its businesses. The ability to do deals to build ecosystems would also have been a core strength in a world where integration matters.

Centralized vs. Decentralized Innovation

Bob Sutton at Stanford’s engineering school has written about the success of Apple being tied to a centralized command structure and a small product line. 

Reference: http://bobsutton.typepad.com/my_weblog/2011/08/5-warning-signs-apple-has-started-to-slip.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FBobsutton%2Fmy_weblog+%28Bob+Sutton%29

HP’s history is one of decentralized innovation, in a way, a far more difficult culture to create and maintain. The spin-off of the PC business and all the downstream consumer innovations that it would inevitably have seeded may not be the most damaging consequence of this spin off. Rather it is the move away from strong decentralized innovation and impact on HP’s culture that may be the biggest loss.

What Motivated HP’s Decision

Without being party to the discussions on this decision, it’s hard to know which of two factors was more important in the decision.

One factor may have been that the capital costs of maintaining leadership in the business services market may have been the critical issue. HP’s core profit center – printers and ink – is certainly under pressure from competition and the substitution of devices and web servers for paper. If you can download to a computer or tablet, you print less. A networked world needs less paper.

A second factor may be the comfort zone of the new CEO. CEO’s come to the board room table with areas of comfort and discomfort. The rejuvenation of a consumer business is no small task and requires many strong innovators. It would likely take time. 

It would be a terrible shame if the decision to spin out the PC business were driven by the unrealistic time expectations of the stock market, and even worse if it were motivated by the way in which senior management was incented. 

Perhaps the best we can hope for is that HP’s PC division will be spun out and its new management team, newly refocused, can pursue innovation, unbound by the trade-offs of portfolio analysis in a business with radically different business models

Strategies for Sharing

OK, so I use lots of different social networking and sharing tools. At some point, you have to ask yourself:

1. Am I using too many tools?
2. Am I spending too much time with them to the detriment of real work?
3. Has the world changed so that your personal brand deserves attention as much as a marketing budget and sales activities are required for larger businesses?

The Situation
I mainly use Linkedin, Facebook, my blog (which you are reading), and my two web sites, one personal and one business (www.eclicktick.com and www.alistairdavidson.com)

For research purposes, I track interesting pages with Evernote. With multiple computers, I use Dropbox for exchanging information between machines and with third parties.

What are my decision rules?

First, I try to use new technologies to understand them. That was one of the reasons for putting up my web sites. A particular challenge on my web sites is navigation, so I have experimented with different navigation approaches for accessing photographs and poems on my personal web site. I use a graphical map, categorization by theme, and ratings of quality. It's not social networking, rather it is the classic role of the editor.

Currently, I am experimenting with Twitter, Klout, Tweettronics, Gist and Hootsuite.

Second, I try to distinguish between content with "reader appeal" and content that is narrowly of interest to me. General appeal content I will put up on Facebook. More obscure material that I may use as a reference source in the future for a project or area I work in I will store on Evernote. Longer articles e.g. from consulting firms, I download as pdf files and store in a directory for future sharing. Base upon the number of Likes and comments I receive, I suspect that I put too much up on Facebook.

Third, most of my own writings get put up on my business web site, www.eclicktick.com under Free White Papers.

Fourth, I put very little content up on Linkedin. Linkedin strikes me as a very salesy site. There are a lot of people showing their wares. I use Twitter, linked to Linkedin to highlight my blog posts on the theory that if I bother to write something on my blog, I would like to think I have something to say that may be of interest to others. I also cross post to Facebook.

While Twitter receives a lot of press in the mainstream media, what is most surprising about Twitter is how few people have many followers and how many people have almost no one following them. Using Tweettronics to look at followership, 40% of Twitter authors have less than 15 people following. And if you have several hundred people following you, you are likely in the top 10% of Twitter authors.

As to the question of how much time to spend, I suspect that like all marketing problems, it boils down to short term and long term outcomes. It's surprising how an article or piece of content can generate business years down the road. This lag makes measurement of a personal brand and sales effectiveness difficult. But for the short and medium term, tracking followership, getting reaction from readers and inquires about business or e.g. job proposals on Linkedin is the only measure of whether your personal content strategy is working.

So, if you are reading this post, what are your decision rules? Are you randomly posting and tweeting? Do you have a content or segment strategy for your personal promotion? What decision rules are you using for allocating your time to different tools and topics?