"Quite frankly, we’re happy that we’re not first to market with the iPhone."--Dennis Strigl, Verizon COO, 2007 (link)
"I don't think Verizon needs the Nokia and Microsoft relationship."--Tony Melone, Verizon CEO, 2011 (link)
There's a backstory to this. Verizon sells CDMA phones, a technology which Nokia dropped years ago. Microsoft jerked Verizon around on the availability of the Kin phone last year. So Verizon doesn't love either company. On top of all that, Verizon has always been a lagging adopter of new phones. It has a reputation for doing more testing than the other operators, and doesn't mind being late on a product or technology.
Still, the quotes are very revealing of an almost subconscious arrogance that I often see in operators around the world. They view their customers as possessions who are allowed to buy only the phones that the operator chooses to offer. The operator sits in the middle and extracts money from everyone. What Melone's really saying is that Microsoft and Nokia will have to pay him a lot of money in order to have the opportunity to sell phones to Verizon customers. Never mind what the customers might want; all that matters is what the vendors do for the operator.
This is why the operators love the increasing competition between smartphone platforms. It gives them that much more leverage to play them off against each other.
Picture yourself as a smartphone company trying to deliver a great new phone to customers. What do you do about these restrictions? It puts a lot more pressure on your financials and your ability to execute -- you need to create a strong brand through heavy marketing, and create products so iconic that people will demand them.
And if you're a phone customer looking to choose whichever phone you want? The situation varies around the world. In some places, phones have to be sold separate from mobile service. That gives the greatest customer choice. In many areas, you can buy a phone and then switch SIM cards to use a different network, but you lose the operator subsidy on the phone. So it costs you hundreds of dollars to exercise freedom of choice. But Verizon doesn't even support that level of choice, so you are stuck with only the phones that Verizon allows you to buy.
The options for Verizon customers: Change operators (if you can find another one with coverage in your area). Change the law to mandate free choice of phones. Or change countries.
Tuesday, 15 February 2011
Monday, 14 February 2011
Impact of the Nokia-Microsoft Alliance: Welcome to the Five-Platform World
Like a big collective cow, the blogosphere is continuing to chew on the Nokia-Microsoft announcement. It seems to be one of those rare events that forces people to stop, step back, and reconsider their assumptions.
I think it's impossible to say today what impact the Nokia-Microsoft alliance will have, because we don't know how well Nokia will execute. If Nokia executes poorly, there won't be any change at all -- both Microsoft and Nokia will continue to gradually decline in mobile. If Nokia executes well, I think the impact could be pretty big. Not asteroid-killing-dinosaurs big, but a very large meteorite, with effects felt worldwide.
For the purposes of this note, I'm going to assume that both Nokia and Microsoft will execute well. That's a risky assumption -- they would not have formed this alliance if they had been executing well in the past. But for today we'll give them both the benefit of the doubt.
How many platforms can we stand?
Ignore the hype from Nokia about the "third platform." The reality is that we're on track to end up with four or five significant smartphone platforms in the US and Europe: Apple, Android, RIM, Windows Phone, and HP/Palm if their new products are excellent. Japan as usual will be very different, and I don't think all five players will be equally active worldwide.
You might ask if the market can accommodate five platforms. There's a school of thought that says the smartphone market is destined to go the way of the PC market -- eventually almost everyone will coalesce on a single platform that has the most applications and licensees. If that's how smartphones are destined to work, nobody seems to have told the customers. Platforms with small numbers of apps (RIM in particular) have continued to sell well. Also, back when I was at Palm and we had far more apps than any other mobile device, it didn't let us destroy Pocket PC, or RIM, or Symbian.
I think apps do matter in smartphones, but so far they appear to matter less than they do in PCs. Without any apps, a PC is useless, whereas most smartphones ship with a lot of functions built in: voice telephony, texting, e-mail, browser, camera, etc. Third party apps are more gravy than steak, at least for now.
So maybe the magic number is two platforms. In marketing, many experts believe customers can hold only two major brands in their heads for any market: a leader and a challenger. Think Coke and Pepsi, Hertz and Avis, Airbus and Boeing. On the other hand, there are plenty of markets which have dozens of competitors. Automobiles, for instance. You can have huge numbers of successful brands there because the market is heavily segmented -- Rolls Royce doesn't compete with Mini Cooper.
I believe the number of smartphone vendors and platforms is going to depend on the actions of the smartphone companies themselves. If they treat smartphones like a single consolidated market, a shakeout is probably inevitable. If they segment the market, creating brands and devices that serve different groups of customers differently, I think there's room for all the platforms to survive.
Unfortunately, at this point most of the smartphone companies are focusing only on slavishly copying Apple. Even RIM, a company with differentiated communicator products, is trying desperately to turn them into iPhone clones. That's a great strategy to ensure commoditization and market dominance by Apple.
Since we're giving Nokia the benefit of the doubt today, let's assume they create differentiated products that help to segment the market. I think that would stimulate other handset companies to do the same thing, leading to a relatively stable multiplatform world.
Here's what that means to the rest of the industry...
For the Android licensees, there will be intense competition for shelf space
In a five platform world, I think it'll be hard for all of the Android licensees to survive. Picture your typical Verisprint store a couple of years from now (Vodorange if you're in Europe). It probably carries three iPhone devices, because Apple has diversified its line. There are a couple of RIM devices with keyboards. We're assuming Nokia and Microsoft are successful, so there are a couple of Nokia smartphones on display. Since we're giving the benefit of the doubt, we'll also assume HP has paid big comarketing dollars to get two of its devices shelved. That's nine smartphones. How much space is left for Android models? I figure maybe two or three devices, split between Samsung, HTC, Motorola, SonyEricsson, LG, etc. Life gets very uncomfortable for a couple of those companies.
Or maybe they get lucky and a RIM or HP gets knocked out of the picture. That would leave space for more Android vendors. But the Android licensees can't control that -- they're counting on Google to drive one or two of the other handset platforms out of business. Is Google prepared to fight that sort of alley knife-fight against an HP or RIM, companies that might otherwise be Google partners?
Android was a fun product for Google when all it meant was bleeding Microsoft. But it eventually made Apple into an enemy, and now Nokia. HP is next, and RIM will come after unless it licenses Android. Is that the lifestyle Google wants? I doubt it.
By the way, I think the Android shelf space problem is one of the reasons why Nokia went with Microsoft rather than Google. Nokia has more control over its fate as a Windows Phone vendor, and it knows Microsoft is willing to do anything to win.
What happens to the other Windows Phone licensees?
It's really hard for me to picture them sticking with the platform in more than a token fashion. They avoided Symbian because it was a stacked deck in Nokia's favor; I think Windows Phone now looks the same. The only way they'd invest more is if Nokia's WinPhone products started to take off strongly in a couple of years, and they were afraid of being left out. I presume that's what Microsoft is counting on (it's how they dealt with IBM in PCs).
Can HP really be the fifth platform?
HP is by far the weakest of the five mobile platforms. Although it has a great legacy, it has neglected its developers tragically and its products are late. The recent HP event shows it still has a legacy of goodwill in Silicon Valley, and you can't count out the world's largest PC company. But HP's success depends on great execution. If its products are timely and deliver on their promises, I think it has a good shot. I am especially impressed by the things HP wants to do to link its products together (another on the long list of things Microsoft fumbled years ago).
But can HP execute? It's been steering a zigzag course in PCs. For several years it invested heavily in differentiation, and hired a lot of former Apple staffers. But in the last year it laid off many of those people, killed its advertising campaign, and focused on Acer-style price competition. Now suddenly HP is talking like it wants to go back to being a differentiated premium vendor. That sort of inconsistency will be deadly when competing directly with the other smartphone platforms.
I can't figure out if the HP guys are Jedi knights or middle-aged paunchy men playing with plastic swords. Based on history, I'm about 60-40 in favor of the plastic swords.
For the mobile operators, all of this produces immense happiness
Sometimes it's better to be lucky than good, and the Nokia-Microsoft deal is a huge stroke of luck for the operators. They have always wanted the handset vendors to be barefoot and pregnant, too weak and divided to fight with them for control over phone customers. A five-platform world is immensely attractive to them because the platforms can be played off against one another. If RIM gets too uppity, you can just tip the product mix toward HP, or vice-versa.
The downside of this for the operators is that five platforms are a lot more work to support. So they'll have conflicting temptations -- carrying more platforms gives them more leverage, but adds to their costs. I think the biggest operators will choose the leverage; Verizon proved that it's not healthy to be cut off from a successful platform, and you can never tell which one is going to be successful next.
For app developers, there will be more pain
The prospect of a five platform market is a nightmare for developers. It's already hard to support two platforms (Apple and Android); the idea of supporting five is a logistical nightmare. Most developers will focus on one or two, but that limits their potential revenue because the available market is smaller.
This situation favors large established developers that can afford to do ports to all the platforms. Unfortunately, large software companies are usually the slowest to innovate, so I fear the net result of a five-platform world is likely to be less innovation in mobile apps.
There will probably be intense interest in cross-platform development environments that let a developer write once and deploy anywhere. The platform companies will resist, and probably governments will eventually get dragged into the debate as they are asked to define what constitutes restraint of trade in an online app marketplace.
The one silver lining might be if the platform vendors start to compete for developers by giving them benefits -- for example, by loosening restrictions in their app stores, and taking a smaller cut of revenue. I hope that will happen, but it's not enough to make up for the fractured development platform.
What it means to Nokia: A chance to survive
Although Europe is really a collection of nations rather than a single place, there are a few things that seem to tug on heartstrings across many European countries. The Eurovision song contest is one, Airbus is another, and Nokia is a third. It represents European style and marketing prowess, and it proves that people in Europe can lead a high-tech industry. So the deal with Microsoft represents far more than a business deal; it feels like a betrayal of a European jewel at the hands of a rapacious American company.
It's important to understand what the alternative was for Nokia. If the company had continued at current course and speed, the decline in gross margins would have put it close to breakeven this year, and it would have started losing money in 2012. Things were already so bad that restoring 10% operating profit this year would require laying off about a third of the company. Obviously the cuts won't be that severe because Elop is aiming at a multiyear recovery, but the numbers show how close Nokia was to a death spiral in which spending cuts and revenue declines start reinforcing each other.
Nokia was like a plane rapidly losing altitude. If you don't pull back on the yoke in time, there's nothing you can do to avoid hitting the ground. The company was very close to that point.
I believe Nokia's directors knew this when they hired Stephen Elop, and his charter was to restructure the company radically before the problems became unsolvable. In that sort of situation, you don't ask what products you ought to save. You figure out how much money you can spend, you make a prioritized list of everything you do, and you start cutting from the bottom of the list until your activities fit into the budget.
I think when Elop and the board did that exercise, all of Nokia's OS business was below the line. They just couldn't afford it.
Although stepping back from OS is emotionally devastating to many Nokia employees and fans, I don't think it's necessarily bad for the company. Operating systems are like plumbing; they don't actually add much value to the building, but if they're built wrong they can destroy it. Symbian advocates talked persuasively about its superior power management and ability to run on low-cost hardware, but as far as I can tell that was never reflected in higher margins for Nokia smartphones. Most Symbian users didn't even know the OS was there, and if they had they would not have paid extra for it. Symbian was enormously complex and difficult to work with, and it cost Nokia a fortune. According to Nokia's annual reports, it paid about $800 million when it bought Symbian, and it reportedly employed at least 2,500 Symbian engineers (link). Those engineers probably cost about $500m a year, or about $5 per Symbian phone sold.
Nokia went into the OS business because it was afraid of depending on someone else's plumbing. Now it's betting that Microsoft is weakened enough that it'll actually cooperate with Nokia. Microsoft will reportedly end up paying Nokia more than a billion dollars to adopt Windows Phone (link), and Nokia can reassign the Symbian engineers to tasks that will actually differentiate Nokia's products. The deal with Microsoft could end up being not a surrender for Nokia, but a liberation.
But as I've said before, it all depends on execution. For the folks inside Nokia, things will feel worse before they feel better. The layoffs are still to come, and until then it will be hard for employees to focus on their jobs. Even after the layoffs are done, it will be a lot of months before Nokia can ship new devices designed to take advantage of Windows Phone. Until then, Nokia is unlikely to reverse its gradual loss of share in smartphones.
When I first held a Nokia n97, I was lost in admiration at how beautifully the hardware was put together. Everything from the shape of the case to the motion of the sliding hinge screamed elegance. Then I tried the software and I wanted to toss it out a window. Nokia's smartphone task is now very simple: produce some great devices like the n97, marry them cleanly with Windows Phone, and partner with Microsoft to get them distributed as broadly as possible.
If Nokia targets those products at real customer needs, and differentiates them from the iPhone rather than just trying to top it, it has a good chance of creating the multi-platform future it's talking about.
It's not as much fun as conquering the entire tech industry, but it's a lot better than going broke. And it's probably the only choice Nokia had.
I think it's impossible to say today what impact the Nokia-Microsoft alliance will have, because we don't know how well Nokia will execute. If Nokia executes poorly, there won't be any change at all -- both Microsoft and Nokia will continue to gradually decline in mobile. If Nokia executes well, I think the impact could be pretty big. Not asteroid-killing-dinosaurs big, but a very large meteorite, with effects felt worldwide.
For the purposes of this note, I'm going to assume that both Nokia and Microsoft will execute well. That's a risky assumption -- they would not have formed this alliance if they had been executing well in the past. But for today we'll give them both the benefit of the doubt.
How many platforms can we stand?
Ignore the hype from Nokia about the "third platform." The reality is that we're on track to end up with four or five significant smartphone platforms in the US and Europe: Apple, Android, RIM, Windows Phone, and HP/Palm if their new products are excellent. Japan as usual will be very different, and I don't think all five players will be equally active worldwide.
You might ask if the market can accommodate five platforms. There's a school of thought that says the smartphone market is destined to go the way of the PC market -- eventually almost everyone will coalesce on a single platform that has the most applications and licensees. If that's how smartphones are destined to work, nobody seems to have told the customers. Platforms with small numbers of apps (RIM in particular) have continued to sell well. Also, back when I was at Palm and we had far more apps than any other mobile device, it didn't let us destroy Pocket PC, or RIM, or Symbian.
I think apps do matter in smartphones, but so far they appear to matter less than they do in PCs. Without any apps, a PC is useless, whereas most smartphones ship with a lot of functions built in: voice telephony, texting, e-mail, browser, camera, etc. Third party apps are more gravy than steak, at least for now.
So maybe the magic number is two platforms. In marketing, many experts believe customers can hold only two major brands in their heads for any market: a leader and a challenger. Think Coke and Pepsi, Hertz and Avis, Airbus and Boeing. On the other hand, there are plenty of markets which have dozens of competitors. Automobiles, for instance. You can have huge numbers of successful brands there because the market is heavily segmented -- Rolls Royce doesn't compete with Mini Cooper.
I believe the number of smartphone vendors and platforms is going to depend on the actions of the smartphone companies themselves. If they treat smartphones like a single consolidated market, a shakeout is probably inevitable. If they segment the market, creating brands and devices that serve different groups of customers differently, I think there's room for all the platforms to survive.
Unfortunately, at this point most of the smartphone companies are focusing only on slavishly copying Apple. Even RIM, a company with differentiated communicator products, is trying desperately to turn them into iPhone clones. That's a great strategy to ensure commoditization and market dominance by Apple.
Since we're giving Nokia the benefit of the doubt today, let's assume they create differentiated products that help to segment the market. I think that would stimulate other handset companies to do the same thing, leading to a relatively stable multiplatform world.
Here's what that means to the rest of the industry...
For the Android licensees, there will be intense competition for shelf space
In a five platform world, I think it'll be hard for all of the Android licensees to survive. Picture your typical Verisprint store a couple of years from now (Vodorange if you're in Europe). It probably carries three iPhone devices, because Apple has diversified its line. There are a couple of RIM devices with keyboards. We're assuming Nokia and Microsoft are successful, so there are a couple of Nokia smartphones on display. Since we're giving the benefit of the doubt, we'll also assume HP has paid big comarketing dollars to get two of its devices shelved. That's nine smartphones. How much space is left for Android models? I figure maybe two or three devices, split between Samsung, HTC, Motorola, SonyEricsson, LG, etc. Life gets very uncomfortable for a couple of those companies.
Or maybe they get lucky and a RIM or HP gets knocked out of the picture. That would leave space for more Android vendors. But the Android licensees can't control that -- they're counting on Google to drive one or two of the other handset platforms out of business. Is Google prepared to fight that sort of alley knife-fight against an HP or RIM, companies that might otherwise be Google partners?
Android was a fun product for Google when all it meant was bleeding Microsoft. But it eventually made Apple into an enemy, and now Nokia. HP is next, and RIM will come after unless it licenses Android. Is that the lifestyle Google wants? I doubt it.
By the way, I think the Android shelf space problem is one of the reasons why Nokia went with Microsoft rather than Google. Nokia has more control over its fate as a Windows Phone vendor, and it knows Microsoft is willing to do anything to win.
What happens to the other Windows Phone licensees?
It's really hard for me to picture them sticking with the platform in more than a token fashion. They avoided Symbian because it was a stacked deck in Nokia's favor; I think Windows Phone now looks the same. The only way they'd invest more is if Nokia's WinPhone products started to take off strongly in a couple of years, and they were afraid of being left out. I presume that's what Microsoft is counting on (it's how they dealt with IBM in PCs).
Can HP really be the fifth platform?
HP is by far the weakest of the five mobile platforms. Although it has a great legacy, it has neglected its developers tragically and its products are late. The recent HP event shows it still has a legacy of goodwill in Silicon Valley, and you can't count out the world's largest PC company. But HP's success depends on great execution. If its products are timely and deliver on their promises, I think it has a good shot. I am especially impressed by the things HP wants to do to link its products together (another on the long list of things Microsoft fumbled years ago).
But can HP execute? It's been steering a zigzag course in PCs. For several years it invested heavily in differentiation, and hired a lot of former Apple staffers. But in the last year it laid off many of those people, killed its advertising campaign, and focused on Acer-style price competition. Now suddenly HP is talking like it wants to go back to being a differentiated premium vendor. That sort of inconsistency will be deadly when competing directly with the other smartphone platforms.
I can't figure out if the HP guys are Jedi knights or middle-aged paunchy men playing with plastic swords. Based on history, I'm about 60-40 in favor of the plastic swords.
For the mobile operators, all of this produces immense happiness
Sometimes it's better to be lucky than good, and the Nokia-Microsoft deal is a huge stroke of luck for the operators. They have always wanted the handset vendors to be barefoot and pregnant, too weak and divided to fight with them for control over phone customers. A five-platform world is immensely attractive to them because the platforms can be played off against one another. If RIM gets too uppity, you can just tip the product mix toward HP, or vice-versa.
The downside of this for the operators is that five platforms are a lot more work to support. So they'll have conflicting temptations -- carrying more platforms gives them more leverage, but adds to their costs. I think the biggest operators will choose the leverage; Verizon proved that it's not healthy to be cut off from a successful platform, and you can never tell which one is going to be successful next.
For app developers, there will be more pain
The prospect of a five platform market is a nightmare for developers. It's already hard to support two platforms (Apple and Android); the idea of supporting five is a logistical nightmare. Most developers will focus on one or two, but that limits their potential revenue because the available market is smaller.
This situation favors large established developers that can afford to do ports to all the platforms. Unfortunately, large software companies are usually the slowest to innovate, so I fear the net result of a five-platform world is likely to be less innovation in mobile apps.
There will probably be intense interest in cross-platform development environments that let a developer write once and deploy anywhere. The platform companies will resist, and probably governments will eventually get dragged into the debate as they are asked to define what constitutes restraint of trade in an online app marketplace.
The one silver lining might be if the platform vendors start to compete for developers by giving them benefits -- for example, by loosening restrictions in their app stores, and taking a smaller cut of revenue. I hope that will happen, but it's not enough to make up for the fractured development platform.
What it means to Nokia: A chance to survive
Although Europe is really a collection of nations rather than a single place, there are a few things that seem to tug on heartstrings across many European countries. The Eurovision song contest is one, Airbus is another, and Nokia is a third. It represents European style and marketing prowess, and it proves that people in Europe can lead a high-tech industry. So the deal with Microsoft represents far more than a business deal; it feels like a betrayal of a European jewel at the hands of a rapacious American company.
It's important to understand what the alternative was for Nokia. If the company had continued at current course and speed, the decline in gross margins would have put it close to breakeven this year, and it would have started losing money in 2012. Things were already so bad that restoring 10% operating profit this year would require laying off about a third of the company. Obviously the cuts won't be that severe because Elop is aiming at a multiyear recovery, but the numbers show how close Nokia was to a death spiral in which spending cuts and revenue declines start reinforcing each other.
Nokia was like a plane rapidly losing altitude. If you don't pull back on the yoke in time, there's nothing you can do to avoid hitting the ground. The company was very close to that point.
I believe Nokia's directors knew this when they hired Stephen Elop, and his charter was to restructure the company radically before the problems became unsolvable. In that sort of situation, you don't ask what products you ought to save. You figure out how much money you can spend, you make a prioritized list of everything you do, and you start cutting from the bottom of the list until your activities fit into the budget.
I think when Elop and the board did that exercise, all of Nokia's OS business was below the line. They just couldn't afford it.
Although stepping back from OS is emotionally devastating to many Nokia employees and fans, I don't think it's necessarily bad for the company. Operating systems are like plumbing; they don't actually add much value to the building, but if they're built wrong they can destroy it. Symbian advocates talked persuasively about its superior power management and ability to run on low-cost hardware, but as far as I can tell that was never reflected in higher margins for Nokia smartphones. Most Symbian users didn't even know the OS was there, and if they had they would not have paid extra for it. Symbian was enormously complex and difficult to work with, and it cost Nokia a fortune. According to Nokia's annual reports, it paid about $800 million when it bought Symbian, and it reportedly employed at least 2,500 Symbian engineers (link). Those engineers probably cost about $500m a year, or about $5 per Symbian phone sold.
Nokia went into the OS business because it was afraid of depending on someone else's plumbing. Now it's betting that Microsoft is weakened enough that it'll actually cooperate with Nokia. Microsoft will reportedly end up paying Nokia more than a billion dollars to adopt Windows Phone (link), and Nokia can reassign the Symbian engineers to tasks that will actually differentiate Nokia's products. The deal with Microsoft could end up being not a surrender for Nokia, but a liberation.
But as I've said before, it all depends on execution. For the folks inside Nokia, things will feel worse before they feel better. The layoffs are still to come, and until then it will be hard for employees to focus on their jobs. Even after the layoffs are done, it will be a lot of months before Nokia can ship new devices designed to take advantage of Windows Phone. Until then, Nokia is unlikely to reverse its gradual loss of share in smartphones.
When I first held a Nokia n97, I was lost in admiration at how beautifully the hardware was put together. Everything from the shape of the case to the motion of the sliding hinge screamed elegance. Then I tried the software and I wanted to toss it out a window. Nokia's smartphone task is now very simple: produce some great devices like the n97, marry them cleanly with Windows Phone, and partner with Microsoft to get them distributed as broadly as possible.
If Nokia targets those products at real customer needs, and differentiates them from the iPhone rather than just trying to top it, it has a good chance of creating the multi-platform future it's talking about.
It's not as much fun as conquering the entire tech industry, but it's a lot better than going broke. And it's probably the only choice Nokia had.
Friday, 11 February 2011
Nokia: Now Comes the Hard Part
Wow, what a week!
Before I get to all of the happenings in tech, I want to acknowledge that the real news this week is coming out of Egypt. Nothing happening in our industry is significant compared to that. All I can say is that I hope the people of Egypt get the government they want, without bloodshed.
While the fates of nations get played out on the world stage, the tech industry has been having its own little revolutions via press release. The big news at the start of the week was that the world's largest PC company, HP, said it's going to make its own PC operating system. That's stunning, and deserves a lot more discussion than it's gotten so far. The relatively light coverage was driven by HP's decision to bury the announcement at the end of a two-hour device preview. It's a huge change, a massive threat to Microsoft, and if HP can execute it will affect every other tech company.
Of course, the phrase "if HP can execute" is a very big if.
Then just this morning, Nokia and Microsoft announced a sweeping, broadly-worded alliance in which Nokia joins the Windows Phone ecosystem. I think Nokia wants to be to Windows Phone what IBM was to MS-DOS in the early years: the lead licensee that makes it a standard and dominates hardware sales. Presumably Nokia has a plan to make sure it doesn't end up roadkill the way IBM did.
The announcement is very vague, and describes a "proposed" partnership. In other words, the executives have decided to work together, but the details are not yet settled. That's typical for huge alliances like this; the CEOs sit down and trade business elements back and forth like poker chips. After the announcement, their managers get to work out the details of what the alliance really means. Some of the expected areas of alignment won't work out, and some other things will be added. So we should expect the Microsoft-Nokia alliance to evolve over the next few months. But the intent seems pretty clear, and it's about as sweeping as it could be short of merging the two companies.
Key points in the announcement:
--Nokia adopts Windows Phone as its smartphone OS. I think the implication is that Symbian and MeeGo both move to the back burner with lower levels of investment. As far as I can tell, Nokia is gradually getting out of the OS business.
--Nokia will participate in the development of Windows Phone. The details of what Nokia would do here are unclear, and my guess is they haven't been fully defined yet.
--Microsoft and Nokia will coordinate the marketing and road map for Windows Phone.
--Bing is now Nokia's search engine, and Microsoft adCenter is Nokia's advertising service.
--Nokia Maps gets used by Microsoft (details unclear).
--Nokia's content and app store will be merged with Microsoft Marketplace. Is this a way of saying Ovi merges with Marketplace? I bet that hasn't been worked out.
--Nokia has split its Devices organization into a Smartphones business (Symbian, MeeGo, and Windows Phone) and a Mobile Phones business that drives low-cost feature phones. It's not clear what the OS will be at the low end. This is the third org structure for Nokia's phone business in the last four years.
This thing is like a Homeric saga. Thirteen years ago, Nokia championed the Symbian initiative in order to keep Microsoft out of mobile phones. Meanwhile, Microsoft embraced the Chinese mobile phone companies in order to drive Nokia into the sea. Instead, both companies got battered by Google and Apple. Now much humbler and weaker, they have decided to work together.
Unanswered questions
There are going to be a lot of these, but the two that I'm most anxious to hear Stephen Elop address are:
What happens to Qt? I couldn't find any mention of it in the Nokia press releases.
Does Nokia have IP ownership over the features it codevelops with Microsoft? If not, how does Nokia avoid being commoditized by Windows Phone clones?
Will it work?
That's the other big question, and no one can answer it right now. I've lived through some whopping corporate alliances over the years, and they often fail. Reading through the Microsoft-Nokia press release gave me flashbacks of the IBM-Apple deal that produced Taligent. The wording, the vagueness of the details, and the miasma of mild desperation clinging to both partners is very familiar.
(If you don't remember Taligent, it was a visionary joint venture by Apple and IBM in the 1990s to create a new PC operating system. It consumed huge amounts of money and talent from both companies, and produced nothing of value.)
The difference is that neither Apple nor IBM had to make Taligent work. It was not central to the future of either company. By contrast, if Nokia really does ramp down development of Symbian and MeeGo, it will have no choice but to make Windows Phone work. Microsoft is in a little less of an existential crisis, but with HP moving away, it really needs a big win somewhere, and as far as I can tell Nokia is its only shot at renewed relevance.
For Nokia, the upside of this deal will come from redirecting its resources. Instead of spending a huge amount of time and money creating OS plumbing that customers can't see and don't value, Nokia should be able to put a lot more effort into creating apps and devices and middleware that delight customers. This could be an incredibly liberating experience for Nokia, triggering a renaissance in its innovation. But it won't happen unless Nokia makes the alliance work. Execution is everything.
The next year will be painful and humbling for Nokia. The company dreamed of ruling the entire tech world, and Stephen Elop is killing that dream. Many Nokia fans online had bought into the dream, and we're going to hear screaming from them. To make matters more difficult, all of the pain will happen up front, as projects are canceled and people get laid off. The benefits won't be visible until the new products ship, and phone development takes a very long time.
In a comment on my post about Nokia earlier this week, Doug Turner pointed to the "Finnish consensus culture" as part of Nokia's problem (link). I agree about the problem, but I think that culture could be turned to an advantage. When there is a consensus, Nokia can move quickly and firmly. So a key to success for the new strategy is creating an internal consensus at Nokia on the need to let go of the OS, and to adopt some different business processes in the smartphone team, in particular the institution of the dictatorial product manager.
These will be hard ideas for Nokia to absorb, but there are precedents. When I was at Apple, it had an incredibly dysfunctional culture that you can probably say was based in Californian cultural values of independent thinking and conflict avoidance. The result was passive resistance so severe that the company was almost unmanageable. Back in my pre-blogging days, I wrote about it in an essay called "Who Killed Apple Computer?" (link) I took a lot of grief from some of my former colleagues over that article, and I am delighted that Apple bounced back from its near-death experience far more vigorously than I thought possible at the time. But it happened only because Steve Jobs made a massive change in Apple's culture and operating practices.
The change at Apple was far bigger than what Nokia needs to do, in my opinion. If Nokia's employees are willing to change, I think it can bounce back too.
But I can't tell yet if the willingness is there. Some of the comments I've seen online from former Nokia employees are jubilant. Here's Julien Fourgeaud, a former Nokia design engineer, on the Elop "burning platform" essay: "It is a brilliant piece of communication, providing a clear description of the situation, and a clear corporate message" (link). But then there's Tomi Ahonen, a former Nokia employee and mobile industry consultant. Tomi has always been my touchstone for Nokia's culture. Reading his weblog feels almost exactly like doing a meeting with Nokia, circa 2007. Tomi's reaction to the Elop memo was total denial. He didn't just disagree with the memo's points, he believed it was a forgery. In a very methodical, logical essay (link), Tomi said the memo sounded like the work of an ill-informed American analyst, and contained omissions and factual errors that no Nokia CEO would make. "No way would Nokia's CEO be so deluded from the facts," he wrote.
I had a different take. The memo sounds like something I'd expect to see from a very busy Silicon Valley CEO who knows in his gut what needs to happen, is trying to explain it to his team, and is a little bewildered that the employees can't see what he sees. Elop's point wasn't the precise details he cited, it was how they all added up. A computer platform is all about momentum. If you're gaining partners and developers and customers, you are on track for success. If you're losing supporters, you are in trouble -- no matter what other evidence you have.
In mathematical terms, you manage to the second derivative -- the rate and direction of change, not the raw numbers themselves.
Nokia's second derivative sucks. You don't need a long analysis to understand that, you just need to look at gross margin. As I said in my note on RIM last fall (link), the leading indicator of decline in a computing platform is erosion in gross margins, because that means you're consuming late adopters and you'll eventually run out of them. Let's look at the gross margins of Nokia's Devices & Services business:
Forget about the big S60 installed base, forget about how cool Ovi is, forget what Symbian did in Japan. History shows that if you wait for all of the indicators to turn red it'll be too late to save the company. Nokia's mobile phone gross margins have been declining for three years, at an accelerating rate. That alone is enough to justify everything Elop said, in my opinion. It would be blindingly obvious to any exec who knows platforms.
A disconnect between Elop's concerns and Nokia's understanding of them would be a mortal danger to Nokia. If that disconnect exists (and I can't judge that from the outside), it needs to be addressed immediately. The only way to fix a communication problem like this is through exhaustive two-way outreach; both parties need to take ownership of the problem.
For Nokia's employees, that means you need to recognize that your new leadership comes from a business culture that sometimes values vision and gut instinct over detailed analysis. The assumption in the computer industry is that things change so quickly that if you wait for a full analysis you'll fail for sure, so you might as well trust your instincts and experience. This sort of decision-making is going to seem reckless and irresponsible to data-driven Nokia, but if you want to be a player in computing you have to get used to it. Listen supportively, ask clarifying questions (as opposed to challenging ones), and comply energetically with what you're told to do even if you don't completely buy into it.
And by the way, if you find that you can't get energetic about the new direction, you need to turn in your badge. If you can't put in your best effort, you'll drag down the energy of the people around you.
For Nokia's new leaders, that means you need to explain in great detail the problems you see and exactly what you expect employees to do. Keep in mind that you're asking them to do things that aren't instinctive to them, and that may go against long habits. Even if they are eager to carry out your plans, they may need a lot of handholding before they have an intuitive understanding of what to do. When they ask rudimentary questions even after you've explained the new strategy three times, you may feel like they're challenging you. Maybe they are, but more likely you just haven't been specific enough. Be patient, try again, and give lots of details on what to do. Don't assume that anything is intuitively obvious.
The alternative to this sort of active outreach is gridlock, which really would doom Nokia. I've seen that happen at other companies, where the CEO and the mass of employees settle into opposing camps, with the CEO grumbling that employees are resistant to change and the employees grumbling that the CEO is "a delusional psycopath (sic) who willingly suspends reality," as Tomi wrote. Once that mindset sinks into a company, it's almost impossible to eradicate.
(My former colleague Nilofer Merchant wrote a whole book on this subject, The New How.)
So the hard work for Stephen Elop and his team is just beginning. Identifying a strategy is relatively simple. The real test of Nokia will be its ability to rally around that strategy and implement it. I'd be surprised if it's not a bumpy process, including the firing of senior managers who don't buy into Elop's view, and a lot of heartache as treasured initiatives are tossed out because the company simply can't afford to do everything it wants to do.
When Steve Jobs returned to Apple, he asked for 100 days to plan significant changes in the company. Nokia's a lot bigger than Apple was at the time, and the challenges are different, so I suggest a longer timeline. I think Nokia probably needs four months just to get the organization aligned, and it takes 18 months to get new products to market. So by the August break, Nokia needs to be settled into its new structure with a good plan for executing on the strategy. And then if everything works well, I hope we'll see some very interesting new products from Nokia in Christmas 2012.
Before I get to all of the happenings in tech, I want to acknowledge that the real news this week is coming out of Egypt. Nothing happening in our industry is significant compared to that. All I can say is that I hope the people of Egypt get the government they want, without bloodshed.
While the fates of nations get played out on the world stage, the tech industry has been having its own little revolutions via press release. The big news at the start of the week was that the world's largest PC company, HP, said it's going to make its own PC operating system. That's stunning, and deserves a lot more discussion than it's gotten so far. The relatively light coverage was driven by HP's decision to bury the announcement at the end of a two-hour device preview. It's a huge change, a massive threat to Microsoft, and if HP can execute it will affect every other tech company.
Of course, the phrase "if HP can execute" is a very big if.
Then just this morning, Nokia and Microsoft announced a sweeping, broadly-worded alliance in which Nokia joins the Windows Phone ecosystem. I think Nokia wants to be to Windows Phone what IBM was to MS-DOS in the early years: the lead licensee that makes it a standard and dominates hardware sales. Presumably Nokia has a plan to make sure it doesn't end up roadkill the way IBM did.
The announcement is very vague, and describes a "proposed" partnership. In other words, the executives have decided to work together, but the details are not yet settled. That's typical for huge alliances like this; the CEOs sit down and trade business elements back and forth like poker chips. After the announcement, their managers get to work out the details of what the alliance really means. Some of the expected areas of alignment won't work out, and some other things will be added. So we should expect the Microsoft-Nokia alliance to evolve over the next few months. But the intent seems pretty clear, and it's about as sweeping as it could be short of merging the two companies.
Key points in the announcement:
--Nokia adopts Windows Phone as its smartphone OS. I think the implication is that Symbian and MeeGo both move to the back burner with lower levels of investment. As far as I can tell, Nokia is gradually getting out of the OS business.
--Nokia will participate in the development of Windows Phone. The details of what Nokia would do here are unclear, and my guess is they haven't been fully defined yet.
--Microsoft and Nokia will coordinate the marketing and road map for Windows Phone.
--Bing is now Nokia's search engine, and Microsoft adCenter is Nokia's advertising service.
--Nokia Maps gets used by Microsoft (details unclear).
--Nokia's content and app store will be merged with Microsoft Marketplace. Is this a way of saying Ovi merges with Marketplace? I bet that hasn't been worked out.
--Nokia has split its Devices organization into a Smartphones business (Symbian, MeeGo, and Windows Phone) and a Mobile Phones business that drives low-cost feature phones. It's not clear what the OS will be at the low end. This is the third org structure for Nokia's phone business in the last four years.
This thing is like a Homeric saga. Thirteen years ago, Nokia championed the Symbian initiative in order to keep Microsoft out of mobile phones. Meanwhile, Microsoft embraced the Chinese mobile phone companies in order to drive Nokia into the sea. Instead, both companies got battered by Google and Apple. Now much humbler and weaker, they have decided to work together.
Unanswered questions
There are going to be a lot of these, but the two that I'm most anxious to hear Stephen Elop address are:
What happens to Qt? I couldn't find any mention of it in the Nokia press releases.
Does Nokia have IP ownership over the features it codevelops with Microsoft? If not, how does Nokia avoid being commoditized by Windows Phone clones?
Will it work?
That's the other big question, and no one can answer it right now. I've lived through some whopping corporate alliances over the years, and they often fail. Reading through the Microsoft-Nokia press release gave me flashbacks of the IBM-Apple deal that produced Taligent. The wording, the vagueness of the details, and the miasma of mild desperation clinging to both partners is very familiar.
(If you don't remember Taligent, it was a visionary joint venture by Apple and IBM in the 1990s to create a new PC operating system. It consumed huge amounts of money and talent from both companies, and produced nothing of value.)
The difference is that neither Apple nor IBM had to make Taligent work. It was not central to the future of either company. By contrast, if Nokia really does ramp down development of Symbian and MeeGo, it will have no choice but to make Windows Phone work. Microsoft is in a little less of an existential crisis, but with HP moving away, it really needs a big win somewhere, and as far as I can tell Nokia is its only shot at renewed relevance.
For Nokia, the upside of this deal will come from redirecting its resources. Instead of spending a huge amount of time and money creating OS plumbing that customers can't see and don't value, Nokia should be able to put a lot more effort into creating apps and devices and middleware that delight customers. This could be an incredibly liberating experience for Nokia, triggering a renaissance in its innovation. But it won't happen unless Nokia makes the alliance work. Execution is everything.
The next year will be painful and humbling for Nokia. The company dreamed of ruling the entire tech world, and Stephen Elop is killing that dream. Many Nokia fans online had bought into the dream, and we're going to hear screaming from them. To make matters more difficult, all of the pain will happen up front, as projects are canceled and people get laid off. The benefits won't be visible until the new products ship, and phone development takes a very long time.
In a comment on my post about Nokia earlier this week, Doug Turner pointed to the "Finnish consensus culture" as part of Nokia's problem (link). I agree about the problem, but I think that culture could be turned to an advantage. When there is a consensus, Nokia can move quickly and firmly. So a key to success for the new strategy is creating an internal consensus at Nokia on the need to let go of the OS, and to adopt some different business processes in the smartphone team, in particular the institution of the dictatorial product manager.
These will be hard ideas for Nokia to absorb, but there are precedents. When I was at Apple, it had an incredibly dysfunctional culture that you can probably say was based in Californian cultural values of independent thinking and conflict avoidance. The result was passive resistance so severe that the company was almost unmanageable. Back in my pre-blogging days, I wrote about it in an essay called "Who Killed Apple Computer?" (link) I took a lot of grief from some of my former colleagues over that article, and I am delighted that Apple bounced back from its near-death experience far more vigorously than I thought possible at the time. But it happened only because Steve Jobs made a massive change in Apple's culture and operating practices.
The change at Apple was far bigger than what Nokia needs to do, in my opinion. If Nokia's employees are willing to change, I think it can bounce back too.
But I can't tell yet if the willingness is there. Some of the comments I've seen online from former Nokia employees are jubilant. Here's Julien Fourgeaud, a former Nokia design engineer, on the Elop "burning platform" essay: "It is a brilliant piece of communication, providing a clear description of the situation, and a clear corporate message" (link). But then there's Tomi Ahonen, a former Nokia employee and mobile industry consultant. Tomi has always been my touchstone for Nokia's culture. Reading his weblog feels almost exactly like doing a meeting with Nokia, circa 2007. Tomi's reaction to the Elop memo was total denial. He didn't just disagree with the memo's points, he believed it was a forgery. In a very methodical, logical essay (link), Tomi said the memo sounded like the work of an ill-informed American analyst, and contained omissions and factual errors that no Nokia CEO would make. "No way would Nokia's CEO be so deluded from the facts," he wrote.
I had a different take. The memo sounds like something I'd expect to see from a very busy Silicon Valley CEO who knows in his gut what needs to happen, is trying to explain it to his team, and is a little bewildered that the employees can't see what he sees. Elop's point wasn't the precise details he cited, it was how they all added up. A computer platform is all about momentum. If you're gaining partners and developers and customers, you are on track for success. If you're losing supporters, you are in trouble -- no matter what other evidence you have.
In mathematical terms, you manage to the second derivative -- the rate and direction of change, not the raw numbers themselves.
Nokia's second derivative sucks. You don't need a long analysis to understand that, you just need to look at gross margin. As I said in my note on RIM last fall (link), the leading indicator of decline in a computing platform is erosion in gross margins, because that means you're consuming late adopters and you'll eventually run out of them. Let's look at the gross margins of Nokia's Devices & Services business:
Forget about the big S60 installed base, forget about how cool Ovi is, forget what Symbian did in Japan. History shows that if you wait for all of the indicators to turn red it'll be too late to save the company. Nokia's mobile phone gross margins have been declining for three years, at an accelerating rate. That alone is enough to justify everything Elop said, in my opinion. It would be blindingly obvious to any exec who knows platforms.
A disconnect between Elop's concerns and Nokia's understanding of them would be a mortal danger to Nokia. If that disconnect exists (and I can't judge that from the outside), it needs to be addressed immediately. The only way to fix a communication problem like this is through exhaustive two-way outreach; both parties need to take ownership of the problem.
For Nokia's employees, that means you need to recognize that your new leadership comes from a business culture that sometimes values vision and gut instinct over detailed analysis. The assumption in the computer industry is that things change so quickly that if you wait for a full analysis you'll fail for sure, so you might as well trust your instincts and experience. This sort of decision-making is going to seem reckless and irresponsible to data-driven Nokia, but if you want to be a player in computing you have to get used to it. Listen supportively, ask clarifying questions (as opposed to challenging ones), and comply energetically with what you're told to do even if you don't completely buy into it.
And by the way, if you find that you can't get energetic about the new direction, you need to turn in your badge. If you can't put in your best effort, you'll drag down the energy of the people around you.
For Nokia's new leaders, that means you need to explain in great detail the problems you see and exactly what you expect employees to do. Keep in mind that you're asking them to do things that aren't instinctive to them, and that may go against long habits. Even if they are eager to carry out your plans, they may need a lot of handholding before they have an intuitive understanding of what to do. When they ask rudimentary questions even after you've explained the new strategy three times, you may feel like they're challenging you. Maybe they are, but more likely you just haven't been specific enough. Be patient, try again, and give lots of details on what to do. Don't assume that anything is intuitively obvious.
The alternative to this sort of active outreach is gridlock, which really would doom Nokia. I've seen that happen at other companies, where the CEO and the mass of employees settle into opposing camps, with the CEO grumbling that employees are resistant to change and the employees grumbling that the CEO is "a delusional psycopath (sic) who willingly suspends reality," as Tomi wrote. Once that mindset sinks into a company, it's almost impossible to eradicate.
(My former colleague Nilofer Merchant wrote a whole book on this subject, The New How.)
So the hard work for Stephen Elop and his team is just beginning. Identifying a strategy is relatively simple. The real test of Nokia will be its ability to rally around that strategy and implement it. I'd be surprised if it's not a bumpy process, including the firing of senior managers who don't buy into Elop's view, and a lot of heartache as treasured initiatives are tossed out because the company simply can't afford to do everything it wants to do.
When Steve Jobs returned to Apple, he asked for 100 days to plan significant changes in the company. Nokia's a lot bigger than Apple was at the time, and the challenges are different, so I suggest a longer timeline. I think Nokia probably needs four months just to get the organization aligned, and it takes 18 months to get new products to market. So by the August break, Nokia needs to be settled into its new structure with a good plan for executing on the strategy. And then if everything works well, I hope we'll see some very interesting new products from Nokia in Christmas 2012.
Wednesday, 9 February 2011
Nokia: An Excess of Cleverness
I'm looking forward eagerly to Nokia's strategy announcement this week. Although Nokia is not highly esteemed in the US, most of the rest of the world recognizes it as an enormously important company: a brilliant manufacturer, a symbol of status and affluence in the developing world, and a source of great pride to its many fans in Europe and elsewhere. If Nokia could combine its strengths with better execution in software and smartphones, it could be a formidable force in the computing industry as a whole, not just in mobile.
In anticipation of the new strategy, I wanted to share a few thoughts on why Nokia has struggled with the intersection of phones and computing, and what it might do to fix the problems.
A couple of disclosures first:
--Several years ago I did a consulting project for Nokia. I've also met with them, I have had a lot of briefings from them, and I know several people who work there. No inside information from any of those sources has gone into this note.
--Before someone posts a comment saying so, yes my views are colored by the place I live, Silicon Valley. Your paradigm may vary.
As is often the case for big successful companies, I think Nokia's strengths are also its weaknesses:
Strength 1: Nokia focuses very well...which can lead to denial of reality
Nokia has a very intense, delivery-focused culture that has enabled it to pursue strategies with awesome focus and determination. Over the years, the company has transformed itself from a paper mill to a rubber boots company to a video monitor company, etc, etc. I can think of very few modern firms that are capable of that sort of huge transformation.
But I think that same determination has also sometimes enabled Nokia to live in denial of reality. As an outsider who has dealt with Nokia a lot over the years, the company often comes across to me as the opposite of a learning organization. Rather than getting inquiry and questions, when you discuss an issue with Nokia you tend to find that there is already an official Nokia answer to it: self-assured, hermetically sealed, and often sounding slightly condescending.
When Nokia was on a roll and executing beautifully, that self-assurance was entirely justified. As somebody once said, "it's not arrogance if you can do it." But as the company faltered, I think its belief in its own specialness and power led it to resist making changes that would have happened at most other companies several years ago. This deepened Nokia's problems.
A quick look at the company's financials tells the story. In 2006, Nokia was on a roll. Its revenue was growing nicely, and it had operating profits of about 12% before taxes. But starting in 2007, Nokia hit a wall. Its revenue flattened and then fell. Despite the revenue problem, Nokia held its R&D, marketing, and administrative spending almost steady in Euro terms, increasing them as a percent of revenue. It's as if Nokia believed four years of revenue stagnation were just a temporary glitch to be endured rather than a fundamental problem that had to be fixed.
(Note: Fiscal years, all figures in $millions. The numbers above and below were restated from euros to dollars. I also excluded miscellaneous revenue and expenses, and one-time charges, because they distort the trends.)
To give you an idea of the impact of Nokia's slowdown, here are a couple of comparisons to Apple.
First, revenue...
Yes, Apple is now a bigger company than Nokia in terms of revenue. That alone is pretty astonishing to me, and I'm sure it irritates the folks at Nokia, since they routinely bristle at this sort of comparison (link).
Here are expenses (R&D, marketing, and administration) as a percent of revenue. Lower is better.
Apple has done a nice job of holding its expense growth below its revenue growth.
And here's the payoff: Operating income
Financially, Apple has just plain run away from Nokia.
When Stephen Elop was announced as CEO of Nokia, people made a lot of hay about his background as a Canadian. I think that was the wrong bit to focus on. To me, the most important element of Elop's background was the ten years he spent in Silicon Valley. I wondered what a Silicon Valley guy would think when coming into a company and seeing financials like these. I believe the reaction would be horror: "Why didn't you people panic back in 2008?" The accepted wisdom here is that you just don't let expenses stay high through four years of declining revenue. That lets the problems fester. Nokia is now a bit like a patient who has delayed routine medical treatment for so long that he ends up in the emergency room needing surgery.
Elop's now-famous memo on Nokia's problems speaks volumes about the company's culture (link). Assuming the memo is real (I am taking the word of the press on this), Elop likens Nokia's situation to jumping from a burning oil derrick into the North Sea -- where, as anyone in the Nordic countries would know, you can die of hypothermia in minutes.
What does it say about the employees' resistance to change that the CEO feels he has to be this alarming?
Strength 2: Nokia manufactures wonderfully...which produces sterile, inartistic smartphones
Nokia is one of the most efficient manufacturing companies on the planet. Very few western companies have ever withstood an all-out assault by China Inc, but Nokia, a company from high-cost Finland, has also been for years the world's lowest-cost major producer of phones. Elop's memo says that cost leadership is now under threat, but still it's an unbelievable accomplishment that ought to be studied in every business school worldwide.
But the same manufacturing-driven culture that turns out great, cheap feature phones by the dozen breaks down when asked to craft an intricate smartphone in which overall system integration is the most important feature. Nokia designs phones using a manufacturing-like process in which different groups create features in parallel. So (to make up an example) one group might do the user interface, another the mail app, and another the browser. That's very efficient for creating lots of phones quickly, but it means it's very difficult to integrate all of the pieces together closely so they produce a great user experience. The best smartphones, like the iPhone, are designed holistically, with all of the pieces coordinated together. A product manager controls the process and can enforce compliance with the product vision. This process is much slower and less efficient than Nokia's, but when you're creating a product with a lot of software, it ensures that everything works together well.
Apple can get away with this less efficient process because it produces one phone at a time. Nokia has 89 different phone models available currently in Europe (link).
Strength 3: Nokia makes fantastic plans...over and over and over again
Nokia has for decades been able to hire the brightest people from a very bright country, Finland. After meeting a lot of Nokia employees, I can tell you that it probably has one of the smartest workforces anywhere. But all that intelligence has produced an analytical culture that breeds complicated plans elaborately fleshed out by committees. Its history in the last decade is a series of wickedly clever, logical strategies that were so complex and took so long to develop and implement that they were often obsolete before they came to fruition. It sometimes seems as if Nokia has been crippled by an excess of cleverness.
I'm reminded of a short story by science fiction legend Arthur C. Clarke, Superiority. In it he described a society that lost a war by continually focusing on the new weapons that were about to come out of the labs, rather than mass-producing the ones that it already knew how to build.
To make matters more difficult, Nokia defined almost every major company in computing and telecommunications as its enemy. At one time or another it has decided that it needed to dominate or defeat Microsoft, Apple, RIM, Google, the entire handset industry, the network equipment suppliers, and of course the mobile operators. Even the US government tries to fight only two wars at once; Nokia has been fighting at least five.
There are so many examples of Nokia's busted plans that I don't know where to start. The Symbian adventure, in all of its permutations, is an obvious one. Nokia has gone through a number of different organizational structures, each of which was supposed to optimize it to compete in the new world of computing and internet. But the one that sticks out at the moment is Nokia's venture in tablet computing.
Don't get me wrong, I do know the differences between an iPad and an n900. They are dramatically different devices that reflect profoundly different design philosophies. But both were designed for a similar high-level goal -- to make computing and web access mobile. Nokia shipped its product first, more than three years ago. Apple shipped last year. Apple is selling seven million units a quarter, while n900 sales are what, a few hundred thousand? Nice, but not a new industry. I know Nokia has learned a lot, and has built a lot of infrastructure, but at some point you have to generate revenue rather than just having a great learning experience.
What do you do, Mr. Elop?
I think the biggest challenge facing Stephen Elop is that he needs to preserve the strengths of Nokia even as he undoes their effects. Expenses have to come down, but at the same time he needs to invest in innovation. The company must keep its manufacturing strength, even as it adopts a design philosophy that undercuts manufacturing efficiency. People at Nokia have to be free to innovate independently, but when left to itself the Nokia culture tends to seek consensus and compromise.
I suspect that given all these changes, even motivating the Nokia workforce may become a challenge. The Nokia people I've talked to love the company and desperately want it to get better. But nobody could live through the last few years without getting a bit burned out. Now the CEO says your home is on fire and you need to jump into freezing water. Would that memo motivate you to work harder, or would it motivate you to work on your resume? I was discussing the memo with several of my old friends from Apple today, and one of them joked that the message to employees was, "Everybody come to the communication meeting Friday! Oh, and you might want to pack up your personal belongings and bring them, just in case." On Friday, Nokia's people will need to see a carrot -- an attractive, plausible vision for the future of the company -- rather than just a stick.
I'll be watching carefully for that vision. We're hearing rumors that Nokia is planning to shift away from its current operating systems and build on top of Windows Phone 7. I doubt that's the full story. For one thing, Nokia can't completely cut off its current software and switch to something else; there would have to be a long transition. Besides, in the Nokia earnings call last month, Elop dropped some hints about his plans. He talked about maintaining two platforms, one aimed at the mass market and another at the high end. He said Nokia's biggest challenge is at the high end, so that's where I would expect a change is most likely. Elop also went out of his way to praise the QT software layer, so I would be very surprised if it's killed. If Windows Phone is in Nokia's future, I think we'd see it at the high end, paired with QT. So we'd get a hybrid OS with Microsoft's plumbing and Nokia APIs.
That would be a bold move, but it's also extremely complicated. I remember when Palm tried to build its future on Windows Mobile, and gave up in disgust a couple of years later when Microsoft licensed Palm's innovations to other phone companies. How would Nokia restrain Microsoft from doing the same thing again? Elop worked at Microsoft, so I'm sure he has some ideas.
Overall, it sounds like a high risk strategy, almost wickedly clever. Exciting stuff. And yet I keep remembering how Nokia's other wickedly clever strategies have worked out.
Note: I've added more commentary on the Nokia announcement here.
In anticipation of the new strategy, I wanted to share a few thoughts on why Nokia has struggled with the intersection of phones and computing, and what it might do to fix the problems.
A couple of disclosures first:
--Several years ago I did a consulting project for Nokia. I've also met with them, I have had a lot of briefings from them, and I know several people who work there. No inside information from any of those sources has gone into this note.
--Before someone posts a comment saying so, yes my views are colored by the place I live, Silicon Valley. Your paradigm may vary.
As is often the case for big successful companies, I think Nokia's strengths are also its weaknesses:
Strength 1: Nokia focuses very well...which can lead to denial of reality
Nokia has a very intense, delivery-focused culture that has enabled it to pursue strategies with awesome focus and determination. Over the years, the company has transformed itself from a paper mill to a rubber boots company to a video monitor company, etc, etc. I can think of very few modern firms that are capable of that sort of huge transformation.
But I think that same determination has also sometimes enabled Nokia to live in denial of reality. As an outsider who has dealt with Nokia a lot over the years, the company often comes across to me as the opposite of a learning organization. Rather than getting inquiry and questions, when you discuss an issue with Nokia you tend to find that there is already an official Nokia answer to it: self-assured, hermetically sealed, and often sounding slightly condescending.
When Nokia was on a roll and executing beautifully, that self-assurance was entirely justified. As somebody once said, "it's not arrogance if you can do it." But as the company faltered, I think its belief in its own specialness and power led it to resist making changes that would have happened at most other companies several years ago. This deepened Nokia's problems.
A quick look at the company's financials tells the story. In 2006, Nokia was on a roll. Its revenue was growing nicely, and it had operating profits of about 12% before taxes. But starting in 2007, Nokia hit a wall. Its revenue flattened and then fell. Despite the revenue problem, Nokia held its R&D, marketing, and administrative spending almost steady in Euro terms, increasing them as a percent of revenue. It's as if Nokia believed four years of revenue stagnation were just a temporary glitch to be endured rather than a fundamental problem that had to be fixed.
(Note: Fiscal years, all figures in $millions. The numbers above and below were restated from euros to dollars. I also excluded miscellaneous revenue and expenses, and one-time charges, because they distort the trends.)
To give you an idea of the impact of Nokia's slowdown, here are a couple of comparisons to Apple.
First, revenue...
Yes, Apple is now a bigger company than Nokia in terms of revenue. That alone is pretty astonishing to me, and I'm sure it irritates the folks at Nokia, since they routinely bristle at this sort of comparison (link).
Here are expenses (R&D, marketing, and administration) as a percent of revenue. Lower is better.
Apple has done a nice job of holding its expense growth below its revenue growth.
And here's the payoff: Operating income
Financially, Apple has just plain run away from Nokia.
When Stephen Elop was announced as CEO of Nokia, people made a lot of hay about his background as a Canadian. I think that was the wrong bit to focus on. To me, the most important element of Elop's background was the ten years he spent in Silicon Valley. I wondered what a Silicon Valley guy would think when coming into a company and seeing financials like these. I believe the reaction would be horror: "Why didn't you people panic back in 2008?" The accepted wisdom here is that you just don't let expenses stay high through four years of declining revenue. That lets the problems fester. Nokia is now a bit like a patient who has delayed routine medical treatment for so long that he ends up in the emergency room needing surgery.
Elop's now-famous memo on Nokia's problems speaks volumes about the company's culture (link). Assuming the memo is real (I am taking the word of the press on this), Elop likens Nokia's situation to jumping from a burning oil derrick into the North Sea -- where, as anyone in the Nordic countries would know, you can die of hypothermia in minutes.
What does it say about the employees' resistance to change that the CEO feels he has to be this alarming?
Strength 2: Nokia manufactures wonderfully...which produces sterile, inartistic smartphones
Nokia is one of the most efficient manufacturing companies on the planet. Very few western companies have ever withstood an all-out assault by China Inc, but Nokia, a company from high-cost Finland, has also been for years the world's lowest-cost major producer of phones. Elop's memo says that cost leadership is now under threat, but still it's an unbelievable accomplishment that ought to be studied in every business school worldwide.
But the same manufacturing-driven culture that turns out great, cheap feature phones by the dozen breaks down when asked to craft an intricate smartphone in which overall system integration is the most important feature. Nokia designs phones using a manufacturing-like process in which different groups create features in parallel. So (to make up an example) one group might do the user interface, another the mail app, and another the browser. That's very efficient for creating lots of phones quickly, but it means it's very difficult to integrate all of the pieces together closely so they produce a great user experience. The best smartphones, like the iPhone, are designed holistically, with all of the pieces coordinated together. A product manager controls the process and can enforce compliance with the product vision. This process is much slower and less efficient than Nokia's, but when you're creating a product with a lot of software, it ensures that everything works together well.
Apple can get away with this less efficient process because it produces one phone at a time. Nokia has 89 different phone models available currently in Europe (link).
Strength 3: Nokia makes fantastic plans...over and over and over again
Nokia has for decades been able to hire the brightest people from a very bright country, Finland. After meeting a lot of Nokia employees, I can tell you that it probably has one of the smartest workforces anywhere. But all that intelligence has produced an analytical culture that breeds complicated plans elaborately fleshed out by committees. Its history in the last decade is a series of wickedly clever, logical strategies that were so complex and took so long to develop and implement that they were often obsolete before they came to fruition. It sometimes seems as if Nokia has been crippled by an excess of cleverness.
I'm reminded of a short story by science fiction legend Arthur C. Clarke, Superiority. In it he described a society that lost a war by continually focusing on the new weapons that were about to come out of the labs, rather than mass-producing the ones that it already knew how to build.
To make matters more difficult, Nokia defined almost every major company in computing and telecommunications as its enemy. At one time or another it has decided that it needed to dominate or defeat Microsoft, Apple, RIM, Google, the entire handset industry, the network equipment suppliers, and of course the mobile operators. Even the US government tries to fight only two wars at once; Nokia has been fighting at least five.
There are so many examples of Nokia's busted plans that I don't know where to start. The Symbian adventure, in all of its permutations, is an obvious one. Nokia has gone through a number of different organizational structures, each of which was supposed to optimize it to compete in the new world of computing and internet. But the one that sticks out at the moment is Nokia's venture in tablet computing.
Don't get me wrong, I do know the differences between an iPad and an n900. They are dramatically different devices that reflect profoundly different design philosophies. But both were designed for a similar high-level goal -- to make computing and web access mobile. Nokia shipped its product first, more than three years ago. Apple shipped last year. Apple is selling seven million units a quarter, while n900 sales are what, a few hundred thousand? Nice, but not a new industry. I know Nokia has learned a lot, and has built a lot of infrastructure, but at some point you have to generate revenue rather than just having a great learning experience.
What do you do, Mr. Elop?
I think the biggest challenge facing Stephen Elop is that he needs to preserve the strengths of Nokia even as he undoes their effects. Expenses have to come down, but at the same time he needs to invest in innovation. The company must keep its manufacturing strength, even as it adopts a design philosophy that undercuts manufacturing efficiency. People at Nokia have to be free to innovate independently, but when left to itself the Nokia culture tends to seek consensus and compromise.
I suspect that given all these changes, even motivating the Nokia workforce may become a challenge. The Nokia people I've talked to love the company and desperately want it to get better. But nobody could live through the last few years without getting a bit burned out. Now the CEO says your home is on fire and you need to jump into freezing water. Would that memo motivate you to work harder, or would it motivate you to work on your resume? I was discussing the memo with several of my old friends from Apple today, and one of them joked that the message to employees was, "Everybody come to the communication meeting Friday! Oh, and you might want to pack up your personal belongings and bring them, just in case." On Friday, Nokia's people will need to see a carrot -- an attractive, plausible vision for the future of the company -- rather than just a stick.
I'll be watching carefully for that vision. We're hearing rumors that Nokia is planning to shift away from its current operating systems and build on top of Windows Phone 7. I doubt that's the full story. For one thing, Nokia can't completely cut off its current software and switch to something else; there would have to be a long transition. Besides, in the Nokia earnings call last month, Elop dropped some hints about his plans. He talked about maintaining two platforms, one aimed at the mass market and another at the high end. He said Nokia's biggest challenge is at the high end, so that's where I would expect a change is most likely. Elop also went out of his way to praise the QT software layer, so I would be very surprised if it's killed. If Windows Phone is in Nokia's future, I think we'd see it at the high end, paired with QT. So we'd get a hybrid OS with Microsoft's plumbing and Nokia APIs.
That would be a bold move, but it's also extremely complicated. I remember when Palm tried to build its future on Windows Mobile, and gave up in disgust a couple of years later when Microsoft licensed Palm's innovations to other phone companies. How would Nokia restrain Microsoft from doing the same thing again? Elop worked at Microsoft, so I'm sure he has some ideas.
Overall, it sounds like a high risk strategy, almost wickedly clever. Exciting stuff. And yet I keep remembering how Nokia's other wickedly clever strategies have worked out.
Note: I've added more commentary on the Nokia announcement here.
Quick Thoughts on the HP Announcement
I like the products, I don't like the event.
What's impressive
I like the devices. I am disappointed that the tablet doesn't have a stylus, but HP is clearly going for the media player space, and it's a worthy competitor there. The Android tablets and PlayBook start to look kind of weak in comparison.
I like the idea of a smaller smartphone. It's something Apple should have done with iPhone. (It did the same thing very successfully with iPod; why not iPhone?)
I like the integration between the phones and tablets. That's a smart move. The more HP can make this a competition of product families, the more of a disadvantage the Android cloners will be at.
I like the apparent attention to detail in all of the products. As you'd expect from a team headed by a former Apple guy, HP/Palm understands hardware-software integration and how to make a product feel good to use. Even if you never buy one of the HP products, you'll benefit from what it's doing because HP is challenging everyone else in the industry to step up their design and integration skills. Samsung and Lenovo, take note.
And I love the idea of putting this same OS on personal computers. It's bold, it's scary, it's...uh, it makes HP look a lot like Apple. Maybe instead of "Think Beyond" they should have called the event "Think Similar."
And how ironic that HP is moving toward having its own OS just as Nokia is moving toward (reportedly) running someone else's.
What's not impressive
I disagree strongly with the timing and content of the announcement. I am not talking about the length of it. Yeah, they went too long, but it's not a big deal in the ultimate scheme of things. I think there's a much deeper problem here. Good marketing is like a fan dance -- you don't reveal as much as people think you do, and you always leave them wanting a bit more. HP built up the expectation that its new products would be available immediately, and then announced stuff that will ship sometime in summer, if not later. We don't even know prices yet. This gives competitors a huge amount of time to react, and more importantly the products themselves are going to seem old by the time they ship.
This isn't a fatal mistake, but I think it would have been far more effective if HP had discussed the products only in a "secret" event for developers. The news still would have leaked, but rather than being disappointed we would have been tantalized and eager to hear more in the months to come.
HP may be developing products more like Apple, but it's still marketing like HP.
What's impressive
I like the devices. I am disappointed that the tablet doesn't have a stylus, but HP is clearly going for the media player space, and it's a worthy competitor there. The Android tablets and PlayBook start to look kind of weak in comparison.
I like the idea of a smaller smartphone. It's something Apple should have done with iPhone. (It did the same thing very successfully with iPod; why not iPhone?)
I like the integration between the phones and tablets. That's a smart move. The more HP can make this a competition of product families, the more of a disadvantage the Android cloners will be at.
I like the apparent attention to detail in all of the products. As you'd expect from a team headed by a former Apple guy, HP/Palm understands hardware-software integration and how to make a product feel good to use. Even if you never buy one of the HP products, you'll benefit from what it's doing because HP is challenging everyone else in the industry to step up their design and integration skills. Samsung and Lenovo, take note.
And I love the idea of putting this same OS on personal computers. It's bold, it's scary, it's...uh, it makes HP look a lot like Apple. Maybe instead of "Think Beyond" they should have called the event "Think Similar."
And how ironic that HP is moving toward having its own OS just as Nokia is moving toward (reportedly) running someone else's.
What's not impressive
I disagree strongly with the timing and content of the announcement. I am not talking about the length of it. Yeah, they went too long, but it's not a big deal in the ultimate scheme of things. I think there's a much deeper problem here. Good marketing is like a fan dance -- you don't reveal as much as people think you do, and you always leave them wanting a bit more. HP built up the expectation that its new products would be available immediately, and then announced stuff that will ship sometime in summer, if not later. We don't even know prices yet. This gives competitors a huge amount of time to react, and more importantly the products themselves are going to seem old by the time they ship.
This isn't a fatal mistake, but I think it would have been far more effective if HP had discussed the products only in a "secret" event for developers. The news still would have leaked, but rather than being disappointed we would have been tantalized and eager to hear more in the months to come.
HP may be developing products more like Apple, but it's still marketing like HP.
Sunday, 2 January 2011
Fearless Predictions for 2011
"A man who goes around with a prophecy-gun ought never to get discouraged: if he will keep up his heart and fire at everything he sees, he is bound to hit something by and by." --Mark Twain
It's that time of the year when journalists, analysts, and bloggers fire their prophecy guns, predicting what will happen in the next 12 months. Most year-end predictions fall into four categories of uselessness: Fish in the Barrel, Shots in the Dark, Wish-Fulfillment, and Self-Service.
Fish in the Barrel are predictions so obvious that they're almost sure to come true. You make this sort of prediction if you're afraid someone will come back in 12 months and point out how many things you missed. Any good prediction list should include about 60% fish, to ensure a nice overall score. For example, the San Jose Mercury News recently predicted that M&A activity will increase in cloud computing in 2011 (link). Gosh, really?
In this spirit, I'd like to predict that water will flow downhill throughout the year. Please keep track of that; I know I will.
Shots in the Dark are things that no one can really predict, but that involve prominent names, so they sound insightful and interesting. You need about 20% of this sort of prediction on your list -- not enough to ruin your average, but enough so you'll sound bold. Besides, if you get lucky and hit on one of these, you can claim credit for the rest of your career. The Merc predicted that Google will buy Twitter this year. Nice.
My shot in the dark is the Newt Gingrich will marry Lindsay Lohan in 2011. I know it's a stretch, but if I'm wrong I can pass it off as a joke, and if I'm right I'll be famous forever.
Wish fulfillment. This is the other 20% of a good prediction list: You should predict one or two things that everyone agrees ought to happen, even if it they aren't likely to actually come true. You don't get blamed if these are wrong, because the failure of the prediction shows that there's something wrong with reality, not wrong with you. The Merc's prediction that Carol Bartz will be fired from Yahoo in 2011 fits in this category.
My wish fulfillment prediction for 2011 is that mobile web apps will take over from native mobile apps. I've been predicting that for years (link); if I keep doing it long enough I'll eventually be right. But in reality I think it won't happen in 2011, because APIs and browser infrastructure for disconnected web apps aren't fully mature yet. Maybe 2012...
Self-Service. These predictions are a whole separate activity. Many industry publications fill valuable column-inches, and reward advertisers, by asking industry CEOs to predict the next year. Most of the CEOs have no idea what to say, so they pass off the task to their PR departments, who naturally predict that the most important event of the next year will be the total dominance of their employer. That's how Wireless Week came up with the following stunning forecasts (link):
--A mobile operator predicts that this will be the year of 4G
--A mobile transactions company predicts that it'll be the year of mobile payments
--A networking equipment company predicts that it'll be the year of WiFi
And on and on. Along these lines, I'd like to predict that 2011 is the year that my startup, Cera Technology, will take over the galaxy.
(By the way, it really will.)
The trouble with all of these sorts of predictions is that you can't do much with them. They're fun to read (and that's probably their main point), but if you take action based on them you'll put your business at risk. Even the fish in a barrel are riskier than they look, because they're built on straight-line predictions of current events, and the past is a poor predictor of the future. For example, here's ReadWriteWeb in 2007 on a thing called SecondLife (link):
Ooookay.
I am not trying to pick on ReadWriteWeb; it's an excellent site, and there were huge numbers of predictions like this at the time. But you get my point.
Since it's impossible to accurately predict the future, the forecast I'd like to see isn't a list of what will happen, but a list of what could happen. And I'm not looking for small things, but the big surprise changes that make or break companies and industries. Specifically, what assumptions are we making that could turn out to be wrong? How would that change the balance of power in the market? And what should we do about it?
Here are my four forecasts of possible game-changers in 2011:
1. The Mobile Data Market Stops Growing
That's a prediction you won't see in many places, but think about it for a minute. Every market eventually saturates. The question isn't whether mobile data will saturate, but when.
Right now everyone's assuming the saturation point is far away, because smartphones are owned by only at most a third of phone users in the US and Europe (link). The other two thirds are still available! I have no doubt that most of those people will eventually get smartphones as their prices drop. Horace Dediu has made this case very persuasively (link).
What I'm not sure of, though, is that those people getting cheap smartphones will pay for data plans.
When I was at Palm, we studied the market for mobile devices very intensely. At the time, about a third of mobile phone users were willing to pay extra for any sort of advanced feature. The other two thirds weren't willing to pay anything extra. Many of them were too poor, some of them were too cheap, and some of them just didn't see any value in it.
If you gave them free hardware, like a cameraphone, they'd take it of course. But when it came time to pay for camera-related services, they took one look at the first month's bill and then stopped sending photos to each other. That's why multimedia messaging was a business failure.
Things have changed since I left Palm. Smartphones are a lot more capable than they were four years ago, the networks are better, and Apple has spent years advertising the benefits of an iPhone. I'm sure that has increased the number of people willing to pay extra for mobile data. But by how much?
No one I know of has studied this directly, but I did recently see some consumer research from one of the major analysis firms. It suggested that the percent of people willing to pay extra has risen to about 40%. If that's true, then rather than being a third penetrated, the mobile data market may be about 75% penetrated. Given the rapid growth of smartphone sales, we could hit the demand wall as soon as late 2011.
I'd be delighted to be wrong in this forecast. Maybe the willing customers are growing much faster than the studies indicate. Maybe the new devices coming this year will suck in a bunch more people. I hope so. But if you think 100% of the population is going to willingly add $200 or more a year to their phone bills just to browse the web from a bus, you're living in fantasyland. And the end may be a lot closer than you think.
What it means. The major mobile companies should be conducting careful consumer research on the willingness of people to pay for data plans. Match that up with the growth rate of smartphones, and see where the lines cross. Then invest (or hide) appropriately.
2. Facebook Becomes Passé
No, Facebook won't die in 2011; I'm sure it will continue to grow throughout the year. But right now Facebook is seen as the hottest player in the Internet, the leading disruptor that forces everyone else to react to it (link, link).
By contrast Google, the previous lead disruptor, is looking more and more like a typical big company trying to hit its growth targets. The most striking evidence for this has been Google's public switch from internally-generated innovation to acquisitions. At the peak of Google's rise, analysts fawned over its plan to innovate internally by hiring bright people and turning them loose on problems. An article in Fortune Magazine in 2006, Chaos by Design, said Google had figured out how to create an internal atmosphere of "structured chaos" in which new ideas would bubble to the top automatically (link). Four years later, Google's VP of corporate development says acquired companies can move faster than Google itself can (link).
It's not a shocking change. Tech Overlords don't last forever, and in fact it seems like their reigns have become shorter over time. IBM was the dominant player for about 25 years, Microsoft for maybe 15, and Google has held that role for less than ten.
If Facebook is the new leader in disruption, what could knock it off the throne? I think its own success may carry the seeds. As Facebook has become more and more popular, the young people who first fueled its success have started to look elsewhere for their social connections. I've been watching the online habits of my teenage daughter and her friends. They use Facebook, of course, but it's just one in a constellation of social tools they use, and it's not at the center.
The hot property among the people I watch appears to be Tumblr, which is a combination of social network and blogging platform. Unlike Facebook, which focuses on your connections, Tumblr focuses on shared self-expression. It's a new social medium, the easiest place online to say "I love these shoes" or "here's how I feel" or "listen to this song that my friend just posted." For users who want to communicate feelings more than ideas, Tumblr is a unique vehicle. No wonder it's popular among teens, who by definition are sorting out their feelings.
The other thing that makes Tumblr different is that it's not overrun by 40-year-olds reconnecting with their high school classmates.
This is a very typical Tumblr page (link).
Here's a Tumblr user on the difference between Tumblr and Facebook, expressed through video clips, which is very typical of the way Tumblr users communicate: link.
I'm not saying that Tumblr is the next Facebook. Right now Facebook has about 30 times more traffic in the US; comparing them is like comparing a ladybug to a wolverine. For all I know, in another six months the kids may have moved on to something else. But the lesson of Tumblr is that Facebook encodes one particular type of social interaction, the friends-list-with-status-updates. The real world of social interaction is far, far richer than that, and we don't know how it will translate online. Chances are that at some point Facebook's powerful paradigm will turn into a straitjacket.
Will that happen in 2011? I have no clue. But I bet it'll take a lot less than a decade.
What it means. Rather than trying to compete with Facebook head on, I'd be looking at other paradigms for social interaction online. What social needs do people have? Approval? Validation? Stimulation? How can you deliver those things online, more effectively than people can get them in person?
3. Book Publishing Dies
Someday, ebooks will enable established authors to sell their writing directly to the public, bypassing the publishers and bookstores and taking 70-80% of the revenue for themselves, rather than giving 85% of it to middlemen. I have no doubt whatsoever that this will happen. The trick is figuring out when. People have been predicting it for more than a decade, but so far the publishers are still in charge.
As you know if you've been reading this blog for a while, I've tried to do some economic analysis on when we'll reach the tipping point where publishers become redundant (link). I won't repeat the whole analysis here, but the summary is that when about 20% of the book-buying public has ebook readers or tablets, it'll make economic sense for an established author to drop print entirely and go straight to electronic distribution (because they can make so much more per copy sold electronically). We're likely to see slow progress for ebooks until that point, and then an accelerating stampede after.
We're not close to the 20% tablet penetration figure yet, and we won't hit it in 2011. But 20% is just an average across all authors; some may find that the market has shifted for them earlier than others.
So I was fascinated when I ran across this LA Times article on authors who have already decided to start ditching their publishers (link). These aren't vanity writers going electronic because they can't get into print; they're established authors who are pulling their backlist books out of print because they can make more money selling them electronically. One of the authors, Joe Konrath, detailed the economics of his decision here.
Check out the Times article and Konrath's scenario on the potential death spiral for bookstores (link). The rumbling sound you'll hear is the Four Horsemen riding after the book publishing industry. Will they arrive in 2011? Not for all publishers, and not all at once. My guess is that we'll continue to hear more hype than action in 2011, with the big switch starting in 2012 or 2013. But the situation is fragile, and today's migration could turn into a stampede sooner than I expect.
What it means. As I've said before, publishers need to find a way to deliver real value to authors and readers in an electronic world. Maybe it's editing services, maybe it's marketing, maybe it's something I can't think of. But it's different from what most of them do today. And no, helping an author navigate the variety of ebook stores is not the answer. An agent can do that.
4. The Year of the Tablet Backlash
I'm sure Apple is going to sell a lot of iPads, Amazon (and maybe B&N) will sell a lot of e-readers, and hopefully the HP/Palm tablet will be interesting. But I think it's very likely that most of the other tablets entering the market this year will exit just as quickly. Why? Because there's no particular user problem they're solving.
I've seen these consumer electronics bubbles before. One company has a successful product, somebody else copies it ineptly, and everyone else piles on because they don't want to be left behind. Never mind that they don't know why they're building the products, or for whom. The result is inevitably a big overshoot, inventory writeoffs, damaged careers, and a press backlash as the manufacturers run away from the market and customers feel burned.
This is another case where I'd be very happy to be wrong, but the situation smells very much like the other product bubbles I've lived through. If the tablet market does take off, it'll probably be because the manufacturers were rescued by an unexpected killer app. If things end badly, give some blame to Google for feeding the overshoot by pushing Android as a tablet OS even though they have no clear idea what the market is for it. Credibility is a precious resource, hard to accumulate and easy to squander. When you have a powerful brand, you can convince people to follow you up the hill on a crusade once, or maybe twice. But after you've burned them enough, they won't follow you readily again. Just ask Microsoft.
What it means. If you're making a tablet app, don't depend exclusively on Android. And if you're creating tablet hardware, the product you should be building is an info pad (link).
There you are, my four forecasts of big game-changers that could happen in 2011. What do you think? You're welcome to disagree with these, but I'm most interested in your predictions of other big, surprising changes that could happen in the next 12 months.
It's that time of the year when journalists, analysts, and bloggers fire their prophecy guns, predicting what will happen in the next 12 months. Most year-end predictions fall into four categories of uselessness: Fish in the Barrel, Shots in the Dark, Wish-Fulfillment, and Self-Service.
Fish in the Barrel are predictions so obvious that they're almost sure to come true. You make this sort of prediction if you're afraid someone will come back in 12 months and point out how many things you missed. Any good prediction list should include about 60% fish, to ensure a nice overall score. For example, the San Jose Mercury News recently predicted that M&A activity will increase in cloud computing in 2011 (link). Gosh, really?
In this spirit, I'd like to predict that water will flow downhill throughout the year. Please keep track of that; I know I will.
Shots in the Dark are things that no one can really predict, but that involve prominent names, so they sound insightful and interesting. You need about 20% of this sort of prediction on your list -- not enough to ruin your average, but enough so you'll sound bold. Besides, if you get lucky and hit on one of these, you can claim credit for the rest of your career. The Merc predicted that Google will buy Twitter this year. Nice.
My shot in the dark is the Newt Gingrich will marry Lindsay Lohan in 2011. I know it's a stretch, but if I'm wrong I can pass it off as a joke, and if I'm right I'll be famous forever.
Wish fulfillment. This is the other 20% of a good prediction list: You should predict one or two things that everyone agrees ought to happen, even if it they aren't likely to actually come true. You don't get blamed if these are wrong, because the failure of the prediction shows that there's something wrong with reality, not wrong with you. The Merc's prediction that Carol Bartz will be fired from Yahoo in 2011 fits in this category.
My wish fulfillment prediction for 2011 is that mobile web apps will take over from native mobile apps. I've been predicting that for years (link); if I keep doing it long enough I'll eventually be right. But in reality I think it won't happen in 2011, because APIs and browser infrastructure for disconnected web apps aren't fully mature yet. Maybe 2012...
Self-Service. These predictions are a whole separate activity. Many industry publications fill valuable column-inches, and reward advertisers, by asking industry CEOs to predict the next year. Most of the CEOs have no idea what to say, so they pass off the task to their PR departments, who naturally predict that the most important event of the next year will be the total dominance of their employer. That's how Wireless Week came up with the following stunning forecasts (link):
--A mobile operator predicts that this will be the year of 4G
--A mobile transactions company predicts that it'll be the year of mobile payments
--A networking equipment company predicts that it'll be the year of WiFi
And on and on. Along these lines, I'd like to predict that 2011 is the year that my startup, Cera Technology, will take over the galaxy.
(By the way, it really will.)
The trouble with all of these sorts of predictions is that you can't do much with them. They're fun to read (and that's probably their main point), but if you take action based on them you'll put your business at risk. Even the fish in a barrel are riskier than they look, because they're built on straight-line predictions of current events, and the past is a poor predictor of the future. For example, here's ReadWriteWeb in 2007 on a thing called SecondLife (link):
SecondLife will become an important platform for marketing, promotion, and of course social networking - as people and businesses figure out different uses for it. Also we think SecondLife will continue its expansion worldwide. Currently you can find Habbo and SecondLife cards in most supermarkets (Wallgreens, CVS) in the US, so this trend should continue in other parts of the world. In short, virtual worlds will become an integral part of the real world in 2007.
Ooookay.
I am not trying to pick on ReadWriteWeb; it's an excellent site, and there were huge numbers of predictions like this at the time. But you get my point.
Since it's impossible to accurately predict the future, the forecast I'd like to see isn't a list of what will happen, but a list of what could happen. And I'm not looking for small things, but the big surprise changes that make or break companies and industries. Specifically, what assumptions are we making that could turn out to be wrong? How would that change the balance of power in the market? And what should we do about it?
Here are my four forecasts of possible game-changers in 2011:
1. The Mobile Data Market Stops Growing
That's a prediction you won't see in many places, but think about it for a minute. Every market eventually saturates. The question isn't whether mobile data will saturate, but when.
Right now everyone's assuming the saturation point is far away, because smartphones are owned by only at most a third of phone users in the US and Europe (link). The other two thirds are still available! I have no doubt that most of those people will eventually get smartphones as their prices drop. Horace Dediu has made this case very persuasively (link).
What I'm not sure of, though, is that those people getting cheap smartphones will pay for data plans.
When I was at Palm, we studied the market for mobile devices very intensely. At the time, about a third of mobile phone users were willing to pay extra for any sort of advanced feature. The other two thirds weren't willing to pay anything extra. Many of them were too poor, some of them were too cheap, and some of them just didn't see any value in it.
If you gave them free hardware, like a cameraphone, they'd take it of course. But when it came time to pay for camera-related services, they took one look at the first month's bill and then stopped sending photos to each other. That's why multimedia messaging was a business failure.
Things have changed since I left Palm. Smartphones are a lot more capable than they were four years ago, the networks are better, and Apple has spent years advertising the benefits of an iPhone. I'm sure that has increased the number of people willing to pay extra for mobile data. But by how much?
No one I know of has studied this directly, but I did recently see some consumer research from one of the major analysis firms. It suggested that the percent of people willing to pay extra has risen to about 40%. If that's true, then rather than being a third penetrated, the mobile data market may be about 75% penetrated. Given the rapid growth of smartphone sales, we could hit the demand wall as soon as late 2011.
I'd be delighted to be wrong in this forecast. Maybe the willing customers are growing much faster than the studies indicate. Maybe the new devices coming this year will suck in a bunch more people. I hope so. But if you think 100% of the population is going to willingly add $200 or more a year to their phone bills just to browse the web from a bus, you're living in fantasyland. And the end may be a lot closer than you think.
What it means. The major mobile companies should be conducting careful consumer research on the willingness of people to pay for data plans. Match that up with the growth rate of smartphones, and see where the lines cross. Then invest (or hide) appropriately.
2. Facebook Becomes Passé
No, Facebook won't die in 2011; I'm sure it will continue to grow throughout the year. But right now Facebook is seen as the hottest player in the Internet, the leading disruptor that forces everyone else to react to it (link, link).
By contrast Google, the previous lead disruptor, is looking more and more like a typical big company trying to hit its growth targets. The most striking evidence for this has been Google's public switch from internally-generated innovation to acquisitions. At the peak of Google's rise, analysts fawned over its plan to innovate internally by hiring bright people and turning them loose on problems. An article in Fortune Magazine in 2006, Chaos by Design, said Google had figured out how to create an internal atmosphere of "structured chaos" in which new ideas would bubble to the top automatically (link). Four years later, Google's VP of corporate development says acquired companies can move faster than Google itself can (link).
"The stunning success of acquisitions that led to products like Google Maps, Android and YouTube has also opened Google to criticism that the company has become Silicon Valley's answer to the New York Yankees, using its wad of cash to buy talent rather than developing it from within." --San Jose Mercury News
It's not a shocking change. Tech Overlords don't last forever, and in fact it seems like their reigns have become shorter over time. IBM was the dominant player for about 25 years, Microsoft for maybe 15, and Google has held that role for less than ten.
If Facebook is the new leader in disruption, what could knock it off the throne? I think its own success may carry the seeds. As Facebook has become more and more popular, the young people who first fueled its success have started to look elsewhere for their social connections. I've been watching the online habits of my teenage daughter and her friends. They use Facebook, of course, but it's just one in a constellation of social tools they use, and it's not at the center.
The hot property among the people I watch appears to be Tumblr, which is a combination of social network and blogging platform. Unlike Facebook, which focuses on your connections, Tumblr focuses on shared self-expression. It's a new social medium, the easiest place online to say "I love these shoes" or "here's how I feel" or "listen to this song that my friend just posted." For users who want to communicate feelings more than ideas, Tumblr is a unique vehicle. No wonder it's popular among teens, who by definition are sorting out their feelings.
The other thing that makes Tumblr different is that it's not overrun by 40-year-olds reconnecting with their high school classmates.
Here's a Tumblr user on the difference between Tumblr and Facebook, expressed through video clips, which is very typical of the way Tumblr users communicate: link.
I'm not saying that Tumblr is the next Facebook. Right now Facebook has about 30 times more traffic in the US; comparing them is like comparing a ladybug to a wolverine. For all I know, in another six months the kids may have moved on to something else. But the lesson of Tumblr is that Facebook encodes one particular type of social interaction, the friends-list-with-status-updates. The real world of social interaction is far, far richer than that, and we don't know how it will translate online. Chances are that at some point Facebook's powerful paradigm will turn into a straitjacket.
Will that happen in 2011? I have no clue. But I bet it'll take a lot less than a decade.
What it means. Rather than trying to compete with Facebook head on, I'd be looking at other paradigms for social interaction online. What social needs do people have? Approval? Validation? Stimulation? How can you deliver those things online, more effectively than people can get them in person?
3. Book Publishing Dies
Someday, ebooks will enable established authors to sell their writing directly to the public, bypassing the publishers and bookstores and taking 70-80% of the revenue for themselves, rather than giving 85% of it to middlemen. I have no doubt whatsoever that this will happen. The trick is figuring out when. People have been predicting it for more than a decade, but so far the publishers are still in charge.
As you know if you've been reading this blog for a while, I've tried to do some economic analysis on when we'll reach the tipping point where publishers become redundant (link). I won't repeat the whole analysis here, but the summary is that when about 20% of the book-buying public has ebook readers or tablets, it'll make economic sense for an established author to drop print entirely and go straight to electronic distribution (because they can make so much more per copy sold electronically). We're likely to see slow progress for ebooks until that point, and then an accelerating stampede after.
We're not close to the 20% tablet penetration figure yet, and we won't hit it in 2011. But 20% is just an average across all authors; some may find that the market has shifted for them earlier than others.
So I was fascinated when I ran across this LA Times article on authors who have already decided to start ditching their publishers (link). These aren't vanity writers going electronic because they can't get into print; they're established authors who are pulling their backlist books out of print because they can make more money selling them electronically. One of the authors, Joe Konrath, detailed the economics of his decision here.
Check out the Times article and Konrath's scenario on the potential death spiral for bookstores (link). The rumbling sound you'll hear is the Four Horsemen riding after the book publishing industry. Will they arrive in 2011? Not for all publishers, and not all at once. My guess is that we'll continue to hear more hype than action in 2011, with the big switch starting in 2012 or 2013. But the situation is fragile, and today's migration could turn into a stampede sooner than I expect.
What it means. As I've said before, publishers need to find a way to deliver real value to authors and readers in an electronic world. Maybe it's editing services, maybe it's marketing, maybe it's something I can't think of. But it's different from what most of them do today. And no, helping an author navigate the variety of ebook stores is not the answer. An agent can do that.
4. The Year of the Tablet Backlash
I'm sure Apple is going to sell a lot of iPads, Amazon (and maybe B&N) will sell a lot of e-readers, and hopefully the HP/Palm tablet will be interesting. But I think it's very likely that most of the other tablets entering the market this year will exit just as quickly. Why? Because there's no particular user problem they're solving.
I've seen these consumer electronics bubbles before. One company has a successful product, somebody else copies it ineptly, and everyone else piles on because they don't want to be left behind. Never mind that they don't know why they're building the products, or for whom. The result is inevitably a big overshoot, inventory writeoffs, damaged careers, and a press backlash as the manufacturers run away from the market and customers feel burned.
This is another case where I'd be very happy to be wrong, but the situation smells very much like the other product bubbles I've lived through. If the tablet market does take off, it'll probably be because the manufacturers were rescued by an unexpected killer app. If things end badly, give some blame to Google for feeding the overshoot by pushing Android as a tablet OS even though they have no clear idea what the market is for it. Credibility is a precious resource, hard to accumulate and easy to squander. When you have a powerful brand, you can convince people to follow you up the hill on a crusade once, or maybe twice. But after you've burned them enough, they won't follow you readily again. Just ask Microsoft.
What it means. If you're making a tablet app, don't depend exclusively on Android. And if you're creating tablet hardware, the product you should be building is an info pad (link).
There you are, my four forecasts of big game-changers that could happen in 2011. What do you think? You're welcome to disagree with these, but I'm most interested in your predictions of other big, surprising changes that could happen in the next 12 months.
Tuesday, 21 December 2010
RIM's Q3 Financials: A Tale of Two BlackBerries
People have been asking for my take on RIM's latest quarterly earnings, which were reported last week (link). The short answer is that I am both less worried and more worried than I was before. I am less worried because the company has more strength than I realized internationally, and I am more worried because the situation in North America is worse than I thought.
Before I get into my comments, I should point out that I don't think you can use a single quarter to declare a company either dead or saved, especially when it's as big and prominent as RIM. In the last couple of years, attitudes toward RIM have gone through a couple of cycles in which negative coverage about the company builds up, the company has a good quarter, and the coverage dies down for a while again. I think it's more useful to look beyond the individual quarters and try to see the long term trends.
In that spirit, I think RIM's earnings were good, but I was more interested in the things management said about moving toward new products and services, and by the very rapid changes happening in RIM's international sales. Overall, I wouldn't say the company is out of the woods at all, and 2011 will be a decisive test of its viability. Here's an overview of the earnings, followed by some comments on international and the new products.
Updating the charts
I plugged the latest numbers into the charts from my post on RIM in October (link). They generally look like good news:
Total BlackBerry Subscribers
(Quarters are RIM fiscal quarters)
Continued nice growth. But we'll come back to this one in a minute.
Net New Subscribers Per Quarter
This one is encouraging: additions went up compared to the quarter before. But it's only one quarter; over the year, the rate of additions is flat. Watch the next several quarters to see if there is a trend.
New Subscribers Per Unit Sold
Continuing to decline. If you're looking for bad news on RIM, this is probably the chart you focus on.
Device Gross Margins
Good news, they were stable for the quarter. This is another statistic where you want to look at the trend rather than just a quarter's results. And the trend for the last year looks stable, which ain't bad. (Remember, I have to estimate this number because RIM doesn't report device gross margins separately.)
Device Average Selling Price
Also stable for the last couple of quarters. Good news.
Service Revenue Per User
I didn't chart this one last time, but it's interesting. RIM currently gets about $15 in service fees per quarter per BlackBerry subscriber. That's the money operators pay to RIM per user for the email service. This revenue has been declining slowly but steadily for years, and I don't completely understand why. RIM says it's due in part to a shift toward prepaid customers, which would fit with the international growth they're seeing. But I wonder if also the operators are becoming less willing to share revenue with RIM. Anyway, I think it's a warning sign -- as your market matures you want to find ways to make more money per user, not less.
Adding up all of the results, it looks like a very nice quarter. But remember, one of my main points was that good short-term numbers can mask long-term problems. And in this case, the way RIM reports its numbers hides some challenges.
Looking ahead: A Tale of Two BlackBerries
Two issues really stuck out to me as I looked at the RIM announcement: International sales, and the comments by RIM's management.
In the post I wrote in October, I missed the importance of RIM's international growth. It was a significant oversight. Several people, starting with mobile analyst Dean Bubley (link), pointed out in comments on my blog that BlackBerry has become very popular among young people in many parts of Europe and elsewhere as a messaging phone. RIM also claims it is the number one smartphone platform in Latin America. Its appeal was explained by analyst Horace Deidu, who notes that the BlackBerry Messenger app is more attractive than generic texting because it's free, and because you can see when your messages have been read (link).
Deidu looked at RIM's most recent quarterly financials, and concluded that RIM's revenues had actually declined in North America, a fact masked by the company's rapid growth in other parts of the world (link). That surprised me, because it wasn't featured prominently in most of the reports on RIM's quarter. It was also pretty alarming. All of the charts above look relatively reassuring, but they're a blend of the international business and the North American one. Since the signs of an impending platform collapse are subtle (something I explained in my October post), it's possible that the international growth is disguising big warning signs in North America.
Unfortunately, RIM doesn't report early indicators like gross margin by region, so I had to look for whatever data I could find. I managed to dig out the numbers on the RIM subscriber base in North America vs. elsewhere. RIM doesn't report this directly, but you can calculate it from the quarterly reports. Here's what I found:
BlackBerry Subscribers
Total subscribers in millions
About half of RIM's subscribers are now outside North America (the crossover will probably happen this quarter). Growth in North America looks pretty slow. Here's what the subscriber growth rate looks like:
Quarterly Growth in Subscribers
Percent growth from quarter before
The BlackBerry subscriber base outside of North America has grown rapidly, increasing 15%-25% every quarter for the last three and a half years. North American growth was also strong until about 18 months ago (the second quarter of FY 2010), when growth softened. In the last two quarters, subscriber growth in North America dropped to almost zero.
Yikes. That sure smells like market saturation to me, and the process is a lot further along than I thought.
(Note: I had to interpolate the numbers for a few quarters in fiscal 2008 and 2009, because RIM didn't report them every quarter.)
So at the risk of oversimplifying a bit, the data and the anecdotes from around the world paint a picture of two RIMs: A consumer messaging phone company that has tapped into a new demographic and is growing fast in various parts of the world outside North America, and a prosumer e-mail phone company that has hit the wall in North America and needs very badly to re-ignite its growth through new products and services. It is the best of times, it is the...oh, you get the idea.
This explains a lot of the confusion we're seeing in attitudes toward RIM online. Like blind men feeling the elephant, we see the RIM that's in front of us -- either the consumer RIM that's growing well, or the prosumer RIM that has stalled out. Who's seeing the real RIM? We all are. The phone market is heavily segmented, and it's common for a company to do well in one region and poorly in another (just look at Nokia).
I have to give a lot of credit to the folks at RIM for managing to crank up the growth internationally just as its North American business faltered. I don't know if they were lucky or good, but it's a very hard balance to hit. On the other hand, I don't think RIM is doing any favors to investors by playing down the regional data in its financial reports. That creates a lot of confusion.
What it means for RIM. It looks like the North American business may be closer to a platform collapse than I realized. I think urgent action is needed to keep the company's North American users loyal. The silver lining in that dark cloud is that RIM's growth in other regions can help fund the changes needed. But time is short, and I still worry about RIM's ability to quickly focus on new differentiators and create compelling user experiences.
There's another path RIM could choose to follow -- it could milk its North American prosumer base for profits while accelerating its growth with young people overseas. But if you can trust the comments of RIM's execs, that is not their direction. They seem to believe they are on the verge of succeeding everywhere, in all segments. RIM co-CEO Jim Balsillie was effusive when he took questions in RIM's recent quarterly conference call (you can read a transcript here).
His message boils down to this:
--PlayBook will be a huge hit.
--The new QNX operating system is great.
--Unlike other companies (Apple and Google), RIM will work in cooperation with mobile operators, content providers, and banks to produce services for customers. RIM will not bypass them, so they will steer customers to RIM.
--Don't worry about the iPhone and Android app base, because mobile applications written to a particular OS will become less important in the near future, as users and developers look to support web standards and intermediate development platforms like Flash.
--RIM provides the sort of reliability and security that enterprises want, so it will be the leading B2B mobile provider.
--RIM is growing very fast, and has a lot of plans for 2011 that have not been fully revealed yet. Adding these all together, the company has tremendous opportunities in the coming year.
I was surprised by how relentlessly upbeat Balsillie's comments were -- most CEOs usually hedge their statements to avoid saying something that could be quoted in a shareholder lawsuit. Balsillie sounds like he's either extremely optimistic or extremely anxious to convince people not to write his company off. But I checked some of the previous calls, and it turns out he's always like that.
It's important that you understand the breadth and depth of RIM's ambition, so here are extended excerpts from his comments:
This is called tying yourself to the mast.
Maybe Balsillie is right. Maybe RIM's on the verge of enormous opportunity and explosive growth. I hope it is (seriously; I like RIM and I'd like it to succeed). But RIM is fighting on an enormous number of fronts, and that scares me for a company that has problems creating high-quality knockout products and is transitioning to a new operating system. The effect could be like flooring the gas in a car with a bad transmission -- you might get a surge of power, or you might leave half the engine on the highway. Restoring momentum to a stalled-out platform is a very difficult task, and it rarely goes smoothly, or succeeds in a single year. With all the hype the company is putting into PlayBook and the rest of its strategy, anything less than stellar success in all regions and all product lines in 2011 is going to be seen as a big disappointment. And that sort of disappointment could be the signal that causes users to turn away from its platform in North America.
As I said two months ago, I think RIM's future depends on its ability to focus, differentiate, and execute. I think the latest earnings just reinforce that.
[Note: This post was revised Dec. 22 to add a paragraph and clarify some explanations.]
Before I get into my comments, I should point out that I don't think you can use a single quarter to declare a company either dead or saved, especially when it's as big and prominent as RIM. In the last couple of years, attitudes toward RIM have gone through a couple of cycles in which negative coverage about the company builds up, the company has a good quarter, and the coverage dies down for a while again. I think it's more useful to look beyond the individual quarters and try to see the long term trends.
In that spirit, I think RIM's earnings were good, but I was more interested in the things management said about moving toward new products and services, and by the very rapid changes happening in RIM's international sales. Overall, I wouldn't say the company is out of the woods at all, and 2011 will be a decisive test of its viability. Here's an overview of the earnings, followed by some comments on international and the new products.
Updating the charts
I plugged the latest numbers into the charts from my post on RIM in October (link). They generally look like good news:
Total BlackBerry Subscribers
(Quarters are RIM fiscal quarters)
Continued nice growth. But we'll come back to this one in a minute.
Net New Subscribers Per Quarter
This one is encouraging: additions went up compared to the quarter before. But it's only one quarter; over the year, the rate of additions is flat. Watch the next several quarters to see if there is a trend.
New Subscribers Per Unit Sold
Continuing to decline. If you're looking for bad news on RIM, this is probably the chart you focus on.
Device Gross Margins
Good news, they were stable for the quarter. This is another statistic where you want to look at the trend rather than just a quarter's results. And the trend for the last year looks stable, which ain't bad. (Remember, I have to estimate this number because RIM doesn't report device gross margins separately.)
Device Average Selling Price
Also stable for the last couple of quarters. Good news.
Service Revenue Per User
(Dollars per quarter.)
I didn't chart this one last time, but it's interesting. RIM currently gets about $15 in service fees per quarter per BlackBerry subscriber. That's the money operators pay to RIM per user for the email service. This revenue has been declining slowly but steadily for years, and I don't completely understand why. RIM says it's due in part to a shift toward prepaid customers, which would fit with the international growth they're seeing. But I wonder if also the operators are becoming less willing to share revenue with RIM. Anyway, I think it's a warning sign -- as your market matures you want to find ways to make more money per user, not less.
Adding up all of the results, it looks like a very nice quarter. But remember, one of my main points was that good short-term numbers can mask long-term problems. And in this case, the way RIM reports its numbers hides some challenges.
Looking ahead: A Tale of Two BlackBerries
Two issues really stuck out to me as I looked at the RIM announcement: International sales, and the comments by RIM's management.
In the post I wrote in October, I missed the importance of RIM's international growth. It was a significant oversight. Several people, starting with mobile analyst Dean Bubley (link), pointed out in comments on my blog that BlackBerry has become very popular among young people in many parts of Europe and elsewhere as a messaging phone. RIM also claims it is the number one smartphone platform in Latin America. Its appeal was explained by analyst Horace Deidu, who notes that the BlackBerry Messenger app is more attractive than generic texting because it's free, and because you can see when your messages have been read (link).
Deidu looked at RIM's most recent quarterly financials, and concluded that RIM's revenues had actually declined in North America, a fact masked by the company's rapid growth in other parts of the world (link). That surprised me, because it wasn't featured prominently in most of the reports on RIM's quarter. It was also pretty alarming. All of the charts above look relatively reassuring, but they're a blend of the international business and the North American one. Since the signs of an impending platform collapse are subtle (something I explained in my October post), it's possible that the international growth is disguising big warning signs in North America.
Unfortunately, RIM doesn't report early indicators like gross margin by region, so I had to look for whatever data I could find. I managed to dig out the numbers on the RIM subscriber base in North America vs. elsewhere. RIM doesn't report this directly, but you can calculate it from the quarterly reports. Here's what I found:
BlackBerry Subscribers
About half of RIM's subscribers are now outside North America (the crossover will probably happen this quarter). Growth in North America looks pretty slow. Here's what the subscriber growth rate looks like:
Quarterly Growth in Subscribers
The BlackBerry subscriber base outside of North America has grown rapidly, increasing 15%-25% every quarter for the last three and a half years. North American growth was also strong until about 18 months ago (the second quarter of FY 2010), when growth softened. In the last two quarters, subscriber growth in North America dropped to almost zero.
Yikes. That sure smells like market saturation to me, and the process is a lot further along than I thought.
(Note: I had to interpolate the numbers for a few quarters in fiscal 2008 and 2009, because RIM didn't report them every quarter.)
So at the risk of oversimplifying a bit, the data and the anecdotes from around the world paint a picture of two RIMs: A consumer messaging phone company that has tapped into a new demographic and is growing fast in various parts of the world outside North America, and a prosumer e-mail phone company that has hit the wall in North America and needs very badly to re-ignite its growth through new products and services. It is the best of times, it is the...oh, you get the idea.
This explains a lot of the confusion we're seeing in attitudes toward RIM online. Like blind men feeling the elephant, we see the RIM that's in front of us -- either the consumer RIM that's growing well, or the prosumer RIM that has stalled out. Who's seeing the real RIM? We all are. The phone market is heavily segmented, and it's common for a company to do well in one region and poorly in another (just look at Nokia).
I have to give a lot of credit to the folks at RIM for managing to crank up the growth internationally just as its North American business faltered. I don't know if they were lucky or good, but it's a very hard balance to hit. On the other hand, I don't think RIM is doing any favors to investors by playing down the regional data in its financial reports. That creates a lot of confusion.
What it means for RIM. It looks like the North American business may be closer to a platform collapse than I realized. I think urgent action is needed to keep the company's North American users loyal. The silver lining in that dark cloud is that RIM's growth in other regions can help fund the changes needed. But time is short, and I still worry about RIM's ability to quickly focus on new differentiators and create compelling user experiences.
There's another path RIM could choose to follow -- it could milk its North American prosumer base for profits while accelerating its growth with young people overseas. But if you can trust the comments of RIM's execs, that is not their direction. They seem to believe they are on the verge of succeeding everywhere, in all segments. RIM co-CEO Jim Balsillie was effusive when he took questions in RIM's recent quarterly conference call (you can read a transcript here).
His message boils down to this:
--PlayBook will be a huge hit.
--The new QNX operating system is great.
--Unlike other companies (Apple and Google), RIM will work in cooperation with mobile operators, content providers, and banks to produce services for customers. RIM will not bypass them, so they will steer customers to RIM.
--Don't worry about the iPhone and Android app base, because mobile applications written to a particular OS will become less important in the near future, as users and developers look to support web standards and intermediate development platforms like Flash.
--RIM provides the sort of reliability and security that enterprises want, so it will be the leading B2B mobile provider.
--RIM is growing very fast, and has a lot of plans for 2011 that have not been fully revealed yet. Adding these all together, the company has tremendous opportunities in the coming year.
I was surprised by how relentlessly upbeat Balsillie's comments were -- most CEOs usually hedge their statements to avoid saying something that could be quoted in a shareholder lawsuit. Balsillie sounds like he's either extremely optimistic or extremely anxious to convince people not to write his company off. But I checked some of the previous calls, and it turns out he's always like that.
It's important that you understand the breadth and depth of RIM's ambition, so here are extended excerpts from his comments:
"We have real differentiation and we have real opportunities for extension of the business in a whole bunch of ways. I mean, just the pent-up interest in the PlayBook is really overwhelming, and then you know the whole aspects of carrier billing and value-added services -- you're just going to see a litany of things happening in that area, both for the BlackBerry tablet and the BlackBerry smartphone over the year....
"We're laying in the pieces here to sustain really exciting growth for a long, long, long time....we'll have some pretty pleasant surprises in what we're doing throughout the calendar 2011....
"We're selling lots...We have good products. Our engagement is good. I feel very, very good about U.S. I mean, we're meeting with the guys that run all the carriers, we've got plans, our carrier partners are in place. There is a real desire to do a lot of things and a lot of these things are locked in and new things are being planned....
"I feel great about where we're sitting for 2011 in the carriers in North America, and we've held our base and we've had growth in shipment and we've had okay net adds, but we're positioned to grow very, very strong. We've really knocked the cover off the ball in so many other markets around the world and yet our penetration in those are still very, very modest....We fell very, very good about the future....
"The product roadmap looks great and the application extension B2B and B2C is so strong.... You're going to see a lot of the stuff come out, really over the next month. So it should be very, very interesting....
"The interest in PlayBook in the B2B is uniformly strong....I can't think of an account that isn't just beating down to get units....Overwhelming interest and overwhelming pressure to get units are a pretty fair characterization. So we're very confident just what it's going to do for businesses....
"The core essence of the business is still just moving along so well and growing so fast. So if you layer in this tablet category, and then you layer in advanced services strategies and then you layer in leapfrog future-proved architectures, I feel very, very good about where we are in the U.S. I feel very good about where we are around the world.... Do I think we're in a position to really take where we are and extend it further in a sustained basis in the U.S. and abroad? In my view, without a doubt....Just watch the year unfold and watch 2011 unfold and you should know. I'm fine just letting the proof being in the deliverables. We do keep delivering and we're going to keep delivering, so we're just going to keep it up....
"I think the PlayBook redefines what a tablet should do. I think we've articulated some elements of it and I think this idea of a proprietary SDK and unnecessary apps -- though there is a huge role for apps, I think it's going to shift in the market and I think it's going to shift very, very quickly and I think there's going to be a strong appetite for web fidelity and tool familiarity. And I think there's going to be a rapid desire for high performance, and I think we are way ahead on that. I think, CIO friendliness is...we are way ahead on that....So I think the PlayBook clearly sets the bar way higher on performance and you're going to see more. I think the enterprise stuff, we're seriously extending. I think the BlackBerry is still number one in social collaboration. And I think with the PlayBook and that environment we're going to set the new standard on performance and tools, very powerful tools and we're growing very, very fast."
This is called tying yourself to the mast.
Maybe Balsillie is right. Maybe RIM's on the verge of enormous opportunity and explosive growth. I hope it is (seriously; I like RIM and I'd like it to succeed). But RIM is fighting on an enormous number of fronts, and that scares me for a company that has problems creating high-quality knockout products and is transitioning to a new operating system. The effect could be like flooring the gas in a car with a bad transmission -- you might get a surge of power, or you might leave half the engine on the highway. Restoring momentum to a stalled-out platform is a very difficult task, and it rarely goes smoothly, or succeeds in a single year. With all the hype the company is putting into PlayBook and the rest of its strategy, anything less than stellar success in all regions and all product lines in 2011 is going to be seen as a big disappointment. And that sort of disappointment could be the signal that causes users to turn away from its platform in North America.
As I said two months ago, I think RIM's future depends on its ability to focus, differentiate, and execute. I think the latest earnings just reinforce that.
[Note: This post was revised Dec. 22 to add a paragraph and clarify some explanations.]
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