Disruptive Tendencies

Microsoft: SteveB or Not SteveB

That is the question.

As I saw Apple reporting record numbers yesterday, I was reminded that nearly thirteen years ago, Microsoft invested $150m in Apple to help keep it afloat because it needed to maintain the semblance that it had “competitors”? Be careful what you wish for!

In July 1997, prior to the Microsoft investment, AAPL was trading at $4.375 (split-adjusted). Overnight, it was up to $258.00, a 58X gain in twelve and a half years. Had Microsoft held onto its shares, they would be worth $8.8b in the open market today, or 26% of the cash on its Balance Sheet as at Q3/2010.

When Microsoft made its investment, its shares were trading at $17.50, and today? They closed up overnight to $31.50, up almost 1.8X over the same period as Apple’s 58X gain. Apple’s market cap today is $234b to Microsoft’s $275b. How times have changed!

It’s interesting to look at other things that were going on around the same time as Microsoft was investing in Apple.

1997 was also the year that Microsoft entered the mobile device market, with the release of Windows CE. This gave them a ten-year head start on the iPhone and a twelve-year head-start on Android! It predated RIM’s IPO. And today? Windows Mobile market share is Palm-esque, and Microsoft is betting on Windows Phone Series 7 to rejuvenate its mobile business. But if branding and momentum are any indication, it seems like a real longshot.

I’ve sat through many Microsoft Executive Briefings, dating back to 1997. Over this period, I have heard it said that Microsoft spends “$1m/hour on research”. I have seen presentations from Microsoft Research staff describing and demonstrating technologies like ClearType (also announced in 1997), a sub-pixel rendering technology designed to improve readability of rendered type on screen.  The obvious application (and one described in the early presentations) was eReaders. In 2007, ten years later, Amazon released the Kindle, ostensibly revolutionizing the delivery of content and forever changing the economics of publishing. Where’s Microsoft at this inflection point? Nowhere to be found.

What other market disruptions has Microsoft missed? (In no particular order)

Search is an obvious one. While Microsoft (and others), was focused on search technology, Google was figuring out that “Search” was all about advertising and catalysed a massive disruption in the media space, billions of dollars in revenue for Google, and hundreds of billions of dollars in shareholder value.

Maps and location services is another one. While Microsoft was focused on producing and selling CDs of MapPoint (a model it still clings to today which it “offers” at $245 on-line), Google was out producing high-resolution street-level images and has catalysed another disruption in location-based services. Today, mobile location is front and center on the Droid platform (and on Droid devices), on iPhones, and incorporated into applications across both ecosystems.

Set-Top Boxes and “owning the living room” Also in 1997, Microsoft acquired WebTV for $503m, predating the launch of Tivo. But while Microsoft apparently struggled with the thought of an appliance that wasn’t Windows-based PC (and encumbered by its emphasis on 3^rd-party OEMs to build on its platform), WebTV evolved to MSN TV (anyone remember this?!?) and has completely disappeared today.

SaaS is one to which Microsoft paid lip service throughout the late ‘90’s with its .NET push. But while it was evangelizing .NET (and SOAP, XML, web services), it was acquiring companies like Navision and Axapta (in 2002 for $1.4b) to expand its CRM and ERP offerings. But was it web-based like Saleforce.com which was founded in 1999 and which didn’t go public until mid-2004? Once again, Microsoft didn’t want to jeopardise Windows Server licenses, so it failed to embrace a market disruption despite having ample warning that it was coming.

Media Players created a seismic event and a brand new market that Microsoft completely missed. While it was focused on defending the tight integration of Windows Media Player in anti-trust lawsuits (in a vain attempt to preserve its “Windows” franchise), Apple came out with iTunes on Windows. More importantly, however, was that Apple also created the iPod, the Trojan Horse that enabled the iPhone.

Developers and App Stores: Microsoft has known since the early battles for OS supremacy (against MAC and OS2), that the selection of a platform is driven by application support. Even with a 30-year history of supporting software developers with incredibly rich tools to build 3^rd-party apps, Microsoft never provided a route to market for developers as Apple has done with the App Store. Apple also figured out how to monetise content and through the creation of a distribution system (iTunes Store), got people comfortable with micro-payments. What’s the difference between .99 for a song or an app? Ultimately, not a thing.

Obviously, there are other examples too. Microsoft completely underestimated the impact of open-source software, missing Linux, Apache, MySQL, etc. It evangelised tablets, but from a Windows bias. It would seem that Apple (and soon others) will trump Microsoft here as well.

It is fair to say, that Microsoft is losing on all fronts.

While it was focused on fighting the DOJ battle, it may ultimately have lost the war. Some, including “the late Nobel economist Milton Friedman believed that the antitrust case against Microsoft set a dangerous precedent that foreshadowed increasing government regulation of what was formerly an industry that was relatively free of government intrusion and that future technological progress in the industry will be impeded as a result.”

I have to agree. The government’s action against Microsoft was ill-advised, in that it is irrelevant that Microsoft may have had a monopoly on the desktop OS. The market isn’t stagnant. Some, like Apple with iTunes and Google with a toolbar, found ways to work within the constraints of a “Windows monopoly”, and still thrive. Others, like Salesforce.com just changed the rules.

Microsoft once had mojo but, for the past decade, has behaved like a neutered puppy. Where it was once aggressive and nimble, today it is passive and slow.

When Bill Gates relinquished the CEO reins to Steve Ballmer in January 2000, Microsoft’s stock was at around $56. With Steve B at the helm, the company has delivered a -44% return, despite being a cash flow machine and having a Balance Sheet that is (was) second to none.

 

If a patient’s ECG flatlined like Microsoft’s stock price, someone would call for the crash cart, get out the defibrillator and try to shock the patient back to normal rhythm. Where’s the crash cart in Redmond?

With a record of having missed so many opportunities to create new markets, where does the buck stop?

SteveB or not SteveB? That is the question.

That’s my .02!

Martin Suter

Mobile Cellular Penetration

I came across a rich set of data visualisation tools earlier today on Google Labs that allow one to run queries against publicly available data sets. Some of these will look familiar to fans of Dr. Hans Rosling, whose TED appearances are the stuff of legend. One of the data sets available is Mobile cellular subscriptions.

Last year, at CTIA, Ivan Seidenberg, CEO of Verizon Communications, talked about 500% penetration as being possible. He meant this largely in the context of an emerging M2M market, but even absent that, it's interesting to look at some representative countries.

I've gone ahead and plotted several below, but you can click through and select your own. (Feel free to share any insights from mining the data in the Comments section below).

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Average penetration worldwide was 60% in 2008. Interestingly, Iran was bang on the average. It will be interesting to track the slope of its curve recently, especially as the phone has been a device being widely used by reformers in the country.

Korea and Japan are an interesting lines. They were both faster out of the gate, but the US has caught up, at least in terms of penetration (my friend and Koreaphile, Allen Kupetz will remind me that their data rates and breadth of uses, including mobile payments/e-wallets far exceed the US).

Norwegians were early adopters too. I remember being blown away in 1992, when my cab driver in Oslo had a cell phone. Today, can you imagine a cabbie not talking on their cell phone constantly in any big city?

The last two that I plotted were the UAE and Saudi Arabia, both of which have achieved far greater than 100% penetration. I had an inkling of this in 2001 when I was living in Dubai. Several Emiratis in our office were already carrying two phones, but again, it wasn't something that I could imagine doing. Clearly it's become the norm.

It is interesting to think about the implications of the mobile Internet in regions of the world, like the Middle East and Africa, where landline penetration lagged developed countries and until recently, Internet cafes were the primary place to access the Internet. Clearly, the game is changing. And while the Internet can be used for evil, I prefer to think of it as having removed all impedance to knowledge acquisition. Is another period of Enlightenment too much to hope for?

That's my .02! What's yours?

Martin Suter
 (martin.suter at iplicensing.net)

Nortel’s Devolution to Non-Practicing Entity?

As someone who once wore a Nortel employee badge, and who counts many ex-Nortel employees among friends and family, watching Nortel’s descent from the peak has been hard to watch. Those, with better visibility into the decision-making than I, will ultimately dissect all of the wrong turns. 

Financial mismanagement, ill-conceived M&A deals, and strategic missteps have, unfortunately, landed Nortel where it is today – in bankruptcy protection and actively divesting entire businesses; its enterprise business possibly to Avaya, its wireless business to Ericsson. But like the Black Knight in Monty Python’s “The Holy Grail”, they’re “not dead yet”, despite hacking off multiple limbs.

When Nokia Siemens Networks’ bid was announced for Nortel’s remaining wireless business (CDMA and LTE roadmap), the decision to exclude wireless-related patents was a very strong indicator of intent. Under the terms of the announced transaction, NSN received a license to Nortel wireless IP, while Nortel retained ownership of said IP. According to reports, the Ericsson deal construct is very similar, with ownership of Nortel patents remaining with Nortel.

Once NSN’s stalking horse bid was announced, others emerged as suitors for the wireless business, including most notably RIM and the eventual winner of the auction, Ericsson.

Why would RIM pursue Nortel’s wireless business at the 11^th hour? Is it because it aspires to get into the CDMA/LTE base station business? I’m guessing not. Could it be that RIM saw Nortel’s moves signaling a fundamental shift in its future business model? Rather than remaining in the messy business of actually producing and selling product, why not sell off the operating businesses for a bunch of cash, throw in non-exclusive licenses to Nortel’s IP, and re-emerge as Nortel, the Non-Practicing Entity (aka Patent Troll)?

Few companies have been as badly burned recently, by NPEs, as has RIM. With its $612.5m settlement with NTP, for what ultimately amounted to the assertion of just a couple of claims (the validity of which was being seriously challenged), and more recently, its settlement with Visto for $267.5m, I’m sure RIM can see a day when Nortel, the NPE, asserts claims against RIM’s LTE products, at a cost to RIM that makes its $1b pseudo-offer seem reasonable. No doubt this is why RIM is rumoured, already, to be pursuing licensing discussions with Nortel for LTE patents.

A key here is that Nortel, as an NPE, would no longer be constrained by the usual rules of engagement that make the assertion of claims, by practicing entities (PEs), so rare. As a going concern, and even with an impressive patent portfolio (reportedly 5,500 patents), it would be highly unlikely for Nortel to assert its patent position against its main competitors. A kind of détente exists with patent holders, who understand that an assertion here will bring a counter-assertion there. The worst fear of PEs, however, is the NPE (or Troll), for which this détente is irrelevant, and where the business model is uniquely about asserting and monetising IP rights.

So Ericsson gets a pass on LTE patent assertion by Nortel, a key US customer committed to LTE, and a team capable of enhancing the CDMA to LTE migration story. Not a bad deal for $1.13b. And while one is tempted to feel sorry for NSN, its original bid of $650m turned out to be woefully miscalculated. One can only guess at what losing the deal with Nortel will end up costing NSN; in legal costs, eventual royalties and market share. Conversely, Ericsson will have gained in all of these areas. Kudos to its management team for realising this.

So what of Nortel? Can it make the transition from multi-billion dollar equipment vendor to NPE/licensing company? There certainly are precedents, even in Nortel’s backyard. Wi-LAN and Mosaid are two companies that have gone done this path, each of which has developed IP licensing as a core competency. Keep an eye on key Wi-LAN or Mosaid employees. If they start to leave, perhaps it’ll be to take on the challenge of monetizing Nortel’s patent portfolio. And if I’m Jim Balsillie, I’d be super pissed.

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)

500 Percent

(Originally posted at http://www.von.com/blogs/guest/2009/04/500-percent.aspx )

During his CTIA keynote, Ivan Seidenberg, CEO of Verizon Communications, expressed his excitement “about the next generation of wireless – the one that will usher in growth that could see penetration rates of more than 500 percent for the mobile industry.” Other Verizon execs were equally giddy at the various breakout sessions that I attended.

Toasters, fridges – LTE is going to solve world hunger. Imagine the stickiness! How likely is subscriber defection if consumers need to replace their home appliances?

Thirteen years ago, at the inaugural JavaOne Conference in 1996, Scott McNeely launched Sun’s vision for Java, a lightweight programming language that would allow developers to write once and run everywhere, including microwaves, toasters, fridges, etc.

Ten years ago, in 1999, the Internet Home Alliance was formed, but in the early days it was more sizzle than steak, as it required extensive home wiring. Nonetheless, the M2M vision was being articulated:

“With the coming PC-plus era, Kenney and others expect a proliferation of connected devices. But Kenney says that gadgets aren't the solution. "It's not about more gadgets," he said. "I don't want a smart thermometer; I want simplicity. How about a clock radio that sets the thermometer for you when you turn it off at night? When you wake up, it could turn on the coffee or whatever."

Seven years ago, in 2002, Toshiba announced its Internet fridge, as did LG Electronics. Of course, the $360 billion by 2005 market sizing estimate appears to have been a little off, but the point is that other than trying to control the customer, there’s nothing new in Verizon’s “vision.”

As I listened to the presentations, I found myself wondering why the examples being cited required a WAN technology or licensed spectrum? Isn’t a WLAN technology, like Wi-Fi, a better fit for networking devices of all kinds in the home? Does Verizon think that LTE is going to replace Wi-Fi in the home?

One of the key talking points laid out by Verizon’s marketing department was about having a centralized support number. “Who do you call for support when all these devices are connected?” was one of the week’s mantras, and apparently Verizon’s value proposition.

Why would I pay a wireless carrier to add devices on my home network?

“Five hundred percent” is a great sound bite, but is it in our future?

This morning, I began to catalog the number of wireless Internet devices I have in my home: three laptops, one Netbook, one iPhone, three iPod Touches, one XBOX 360, two Sony PSPs, two EyeFi-enabled cameras, one printer, one backup hard drive, one Wi-Fi radio. Even without the wireless fridge, toaster, microwave, meter reader or washing machine, I’m at 16 Wi-Fi devices. How much does it cost me to connect each of these to the network using Wi-Fi? Nada. Have I ever felt a need to have a single number to call for support? Nope.

Five hundred percent isn’t the future. It’s the present. And I don’t have to have a wireless carrier provision every device. I don’t have to pay a service charge for every device. And I don’t have to worry about buying a new fridge every time I change service providers.

That’s my .02!

Martin Suter is vice president of business development at BelAir Networks, a provider of broadband mesh solutions for Wi-Fi, WiMAX, 4.9 GHz Public Safety and 5.9 GHz ITS networks. Previously, Martin was the CEO at Cohda Wireless, where he raised the company’s profile and negotiated a licensing deal with a Fortune 100 vendor in its core franchise. Prior to Cohda, he was vice president of business development at MeshNetworks Inc., a classic tech transfer/disruptive technology success story that achieved a major liquidity event for its investors in Q4/2004 with its acquisition by Motorola. Martin also was responsible for building several high profile alliances with and for leading technology companies, including Fujitsu, Microsoft, Netscape, Sun Microsystems, and Teradata. Additionally, Martin has successfully negotiated technology transfer, distribution and/or licensing deals with companies like 3Com, BioChem Pharma, Dow Chemical, Exodus, Fujitsu, IBM, Microsoft, Motorola, Netscape and Sun.

Mobile Internet Genie is Out of the Bottle

(Originally posted at http://www.von.com/blogs/guest/2009/04/mobile-internet-genie-is-out-of-bottle.aspx)

And it’s not going back...

What a week it’s been!

After blogging last month about the market disruption being caused by the combination of Wi-Fi and unlicensed spectrum, the industry reeled as it grappled with the implications of the release of Skype on the iPhone and iPod.

The buzz at CTIA was polarized around two ends of the spectrum — the incumbent wireless carriers, especially Verizon and its LTE plans, and the disruptors, led by Skype.

One of the characteristics of the climb to the “Peak of Inflated Expectations,” as articulated by Gartner, is that the only enterprises making money are conference organizers and magazine publishers. The ascent of LTE and the noise floor created by the buzz at CTIA certainly bears this out!

But LTE is just another technology. It has the potential to expand the adoption of the mobile Internet, but unlike Wi-Fi, spectrum owners that have a history of tightly controlled walled gardens will roll it out. The question is whether companies will continue to propagate a closed, walled garden approach or recognize this as the mobile Internet. There are interesting analogs in the fixed Internet that bear considering. AOL tried, for far too long, to contain its subscribers within the AOL controlled portion of the Web, and look at what’s happened to them. Does anybody remember CompuServe? Could the same thing happen to Verizon or Deutsche Telekom? Only time will tell.

The Internet has proven itself to be fertile ground for disruption. Look at how it has changed the music industry, newspapers, advertising, retailing, travel, residential voice and long distance service, and even the OS and office suite. ... Companies that “got it” on the fixed side have thrived, while those that resisted it have withered and died. Why should we expect the mobile Internet to be any different?

The availability of Skype on iPhones and iPods has, once again, brought the opposing forces into sharp contrast. Now faced with the potential loss of voice minutes, the wireless carriers are reacting in the only way they know how, by locking it out. AT&T is at least to be commended for allowing Skype traffic on its Wi-Fi network, while Deutsche Telekom companies are saying they will even restrict its use across the company’s Wi-Fi hot spots.

The battle is moving to the FCC in the U.S. where lobby groups are saying that blocking applications such as Skype is in violation of net neutrality regulations. While this argument may take years to resolve in this forum, I would bet that the consumer will decide which approach they favor, long before the courts do, and thus which companies they will continue to support as subscribers.

The Internet is kryptonite to a walled garden. Those incumbent carriers that don’t understand this and continue to try and force a controlled, mobile walled garden experience on their subscribers will ultimately lose.

That’s my .02!

Martin Suter is vice president of business development at BelAir Networks, a provider of broadband mesh solutions for Wi-Fi, WiMAX, 4.9 GHz Public Safety and 5.9 GHz ITS networks. Previously, Martin was the CEO at Cohda Wireless, where he raised the company’s profile and negotiated a licensing deal with a Fortune 100 vendor in its core franchise. Prior to Cohda, he was vice president of business development at MeshNetworks Inc., a classic tech transfer/disruptive technology success story that achieved a major liquidity event for its investors in Q4/2004 with its acquisition by Motorola. Martin also was responsible for building several high profile alliances with and for leading technology companies, including Fujitsu, Microsoft, Netscape, Sun Microsystems, and Teradata. Additionally, Martin has successfully negotiated technology transfer, distribution and/or licensing deals with companies like 3Com, BioChem Pharma, Dow Chemical, Exodus, Fujitsu, IBM, Microsoft, Motorola, Netscape and Sun.

A Nine Inch Nail in the Recording Industry ’ s Coffin

I find it fascinating that many market disruptions are not technological, but rather business models enabled by technology. What happens when there are no barriers to entry? What happens in a world with no friction? What happens when customers can interact directly with sellers?

Dell shook up the PC industry by first selling direct to end-users. Google has gone from a Search engine to the dominant force in advertising, and along the way has figured out how to do "free" very well. eBay brought the garage sale to the world. And finally, recording artists are realising that there's money to be made selling direct to your fan base, without compromising your artistic integrity.

Nine Inch Nails just released a collection of 36 songs, called "Ghosts I-IV". MSNBC.com suggests that "2008 may go down in history as the beginning of the end for the recording industry." I beg to differ. It's been like watching death by 1000 cuts in slow motion. 2008 is hopefully the year where the final nail is hammered into the coffin, a nine inch nail.

Where did it all go wrong for the music industry?

Record companies are licensing companies. What is a "record deal", if not a license granting rights to an artist's intellectual property to a record company along with the rights to make or have made physical product, the rights to distribute and sell this IP in return for a royalty rate paid to the creator of the IP. For decades, they held the keys to the kingdom. Barriers to entry were high...Studio time, production and mixing equipment, analog master tapes were expensive, manufacturing, promotion to radio stations, and distribution channels...The studios had a wonderfully integrated system, but it was a closed system. The only way that an artist could get a record on somebody's turntable was to play within the system, by their rules.

Video may have killed the radio star, but digital is what killed record companies.

The shift from analog/vinyl to digital was the first nail in their coffin. Cheap, ubiquitous broadband was another nail. Napster got people used to downloading content and not having a physical instantiation of the music (i.e. a CD) and was another nail. MySpace and other social networking sites facilitated the viral promotion of artists; another nail. YouTube further helped them distribute music videos and concert footage; another nail (This one in MTV). Apple bundled GarageBand with the MAC, enabling anyone to produce decent quality music quickly and cheaply; yet another nail. iTunes and the iPod gave us a means of storing and cataloguing our music, eliminating the need for a home stereo system or physical form factors; another nail. iTunes gave us a means of purchasing music that no longer required a trip to the mall; the eighth nail in the coffin.

And in the past year, major artists like Radiohead and now Nine Inch Nails selling direct to their fans. Hopefully, the ninth and final nail.

In his book, The Long Tail, Chris Anderson articulates how in a world without friction (i.e. the Internet), even those with the most arcane tastes, can find something they want, growing the overall size of the market. He posits that there is more money to be made across the entire breadth of the market, as opposed to a narrow, deep market as the music industry used to be.

The music industry isn't dead, record companies and MTV are.

But have we, as consumers, ended up winning or losing in this deal? I would suggest that we've won big-time.

Trent Reznor, from NIN comments on Ghosts I-IV: "The end result is a wildly varied body of music that we're able to present to the world in ways the confines of a major record label would never have allowed..."

The probability of my selecting a Nine Inch Nails CD and paying $15.95 to see whether I liked it or not would have been pretty small. Or Radiohead for that matter.

But give me a chance to experience and experiment with new tastes in a low-risk way, and I'm all over it. Does it get any better?

That's my .02!

Martin Suter

(martin.suter@iplicensing.net)

849: Is that miles or light years?

It’s only 849 miles from Redmond to Palo Alto, but that might as well be light years.

An article in today’s New York Times asserts that the biggest hurdle in the integration of Microsoft & Yahoo will be the clash of cultures. I think they’re being politically correct. It’s bigger than that. It’s a religious war.

During the mid-90’s, I was fortunate to have a front row seat as the Internet took off. Whether it was sitting in meetings with Mark Andreesen and Jim Barksdale or sharing a stage with Scott McNeely in front of thousands of fans, it was heady stuff. I spent 1995-97 within the “ABM” alliance (Anything but Microsoft), and bought into the standard Valley exhortations that Redmond represented “the dark side”.

But in late-1997, things changed for me. I joined another early-stage start-up (FastLane), was given a blank sheet of paper, and the vague task of creating a strategic alliance with Microsoft. My first visit to Redmond was in October 1997, and I will admit that the hair stood up on the back of my neck. I felt like an impostor and wondered whether I had really crossed over to the dark side.

As we took the company from zero to Active Directory poster child over the next 3 years, I spent between 2-3 weeks/month on campus, working across the organization. By the time FastLane was acquired in Q3/2000, I was as deeply embedded in the Redmond culture as I had been in the Valley’s just a few years previous. I was able to expound on Microsoft’s position on the DOJ anti-trust lawsuit and its .NET strategy in great detail. I had drank the Microsoft Kool-Aid. Perhaps I had been assimilated.

So what of the Yahoo takeover?

The average Yahoo employee has gotten out of bed every day believing that Redmond equates to the dark side. Their peers, with whom they drink at Gordon Biersch or against whom they play Ultimate, all believe the same thing. They have spent their careers trying to disprove that “Resistance is Futile”. So how do you convert someone for whom the battle has taken on quasi-religious overtones? A more fundamental question is “Should you?”

As I have stated in previous posts (“The Open Source Red Herring”), I have a ton of respect for Microsoft and that many in the Valley hide their motives behind the pseudo-altruistic cloak of “open source”. However, I would also suggest that, perhaps, Microsoft has met its match with the Internet. It’s been difficult to watch from the sidelines, as Microsoft has touted web architectures and web services (.NET) for a decade now. But there has been a tremendous disconnect between its words and its actions in this regard. It’s easy to see why, as the Web is potentially disruptive to its 2 most profitable franchises: Windows and Office.

But unfortunately, when Microsoft takes a close look in the mirror, it must admit to itself that it still struggles to “get” the web. Salesforce.com got the web and the power of SaaS. Google got the web and the power of advertising. Yahoo got the web and the stickiness of subscriptions. Add in Facebook, YouTube, and most of Web 2.0, and Microsoft doesn’t even earn “fast follower” status.

Perhaps its failure, to truly lead on the Web, is cultural and, ultimately, intractable. Perhaps the gravitational pull of the web in the Valley is too strong, even for Microsoft, to try and move it into its Redmond orbit.  Spinning out its Internet properties with some cash, and merging with Yahoo rather than trying to assimilate it into Redmond, may be Microsoft’s wormhole through cyberspace.

The answer may lie, not in bringing the Valley to Redmond, but in carving out a piece of Redmond, and letting it leave home and move to the Valley.

That’s my .02 for today!

Martin

(martin.suter@iplicensing.net)