Minggu, 29 April 2012

The "Bubble" and What's Really Going on with Startups

Today's New York Times declares that there an investment "bubble" in Silicon Valley being concealed by venture capitalists, and that it's so out of control that startups are being told not to generate revenue for fear of disrupting their fantasy valuations (link).

I think the article is about 1/3 correct and 2/3 nuts.  Yes, some startup valuations do seem amazingly high.  No, there isn't some grand conspiracy, and there isn't necessarily a bubble. 

This is an important issue for the mobile tech world because mobile startups are a huge part of the so-called bubble.  If you're working in a mobile startup, or thinking about doing one, you need to understand what's happening.  Here's my take:

I've spent more than a year pitching the startup I'm working in, Zekira, to VCs and angels in Silicon Valley.  I've met with scores of them, taken them to breakfast and coffee, and had long philosophical conversations with them about our company in particular and startups in general.  I have friends and former co-workers who now work in the VC and angel world.  I've also spent a huge amount of time networking with other entrepreneurs, successful and otherwise, and the conversation always turns to the fund-raising process.  So while I don't claim to be the world's greatest expert on startup funding, I do have a pretty good ringside seat.  Here's my list of venture funding myths and realities as they relate to the Times article:


Myth 1.  Venture capitalists and angels are in the business of creating new technology products.  Not true, and in this respect the article is right.  Many people who work as VCs and angels are passionate about technology and love to be personally involved with new tech products.  They give great, enthusiastic advice.  But their business is to create companies they can sell.  Period.  They don't get paid until a company either gets acquired or goes public, so their focus is on creating companies that they can sell to someone for a markup.

There's nothing new about this.  Venture capital has always worked this way.


Myth 2.  We are in another tech bubble "worse" than 1999 (in the words of the article).  In the late 1990s, valuations of all tech companies, startups and otherwise, were wildly over-optimistic.  This situation made it easy for VCs to take new tech companies public at a much earlier stage, and at a higher value, than was possible previously.  As one VC explained to me at the time, "there's market demand for companies that are much less mature than those we launched in the past, so we're going to fulfill that demand."

Because the entire stock market was involved, and because immature companies were offered in IPOs, the retirement fund of every American was put at risk.  That's not the situation today.  The market valuations of existing tech companies are not wildly out of whack (a point made well here).  The startups being sold without revenue are almost all being peddled to other tech companies, not to the public.  Facebook and Google and some other big firms have decided that they need to buy consumer internet and mobile companies with rapidly growing audiences.  Competition between them has driven up the valuation of those companies.

Are the valuations inappropriate?  I don't know, but Facebook and Google and the rest are big and successful and presumably know what they're doing.  They can also afford to lose the money they're spending.  So even if there is a bubble, at this point I don't think is is even remotely the sort of economic threat it was in the late 1990s.

As for the VCs' role in this, they're just doing what they always do, fulfilling the demand for a particular type of company.


Myth 3.  Startups are being told not to make revenue because that will disrupt their valuations. 

Oh, please.

The reality is that there are at least two tracks of startup activity, which I will label trendy and traditional.  The trendy startups are web and mobile services hoping to be acquired by the big web players.  For those companies, the source of their valuation is the number of users they attract and the rate at which they grow.  Revenue is irrelevant because Facebook and friends aren't buying revenue, they are buying market position.

In a trendy startup, making revenue is a problem because it distracts you from the goal of growing the audience.  The VCs are right to tell companies to disregard it.

But the traditional startups are treated very differently.  In those companies, the VCs are looking for a strong team, good product, and proven revenue.  In fact, the problem is not that companies are being told not to make revenue, it's that even angels are often demanding that companies have a customer base and substantial revenue streams before they'll make an investment.  In other words, the investors don't act like the stereotype of early-stage people who fund a cool idea, they act more like banks.

From my perspective, it looks like most of the big VCs are investing in a mix of trendy and traditional startups.  Among the angels there seem to be different circles, some specializing in trendy startups and some specializing in traditional ones.  But the trendy startup scene gets almost all the public attention.  It's what drives the startup weblogs, it drives the big drinking parties, it brings people out to the conferences, and it generates most of the press coverage for spectacular acquisitions.

You often see news articles focus on the trendy startups as if they're the only thing happening in venture capital.  That's exactly what the Times article did.

The trendy startup scene is entertainment, spending a weekend in Vegas without the long drive across the desert.  Like gambling, the attraction of trendy startups is that you might get wildly rich for a small investment of money and time.  Also like gambling, you'll probably lose your shirt. 

Is that a bad thing?  Only if you bet money and time that you can't afford to lose.

The danger to the public (and to the economy as a whole) will be if and when trendy startups start to be offered up in IPOs.  If that happens, it will be very important for all of us, the New York Times included, to raise an alarm very loudly.  But that's not the situation we're in today.  Calling today's situation a bubble is crying wolf, because it may cause people not to pay attention when there really is a problem in the future.

Both George Will and Paul Krugman are right about the retirement/social insurance problem

I watched the economic panel on This Week with George Stephanopolous this morning.  Toward the end, both Will and Krugman made salient points about Social Security.  Will pointed out that increased life expectancies have produced longer average payout periods for Social Security to beneficiaries.  Krugman pointed out that the more affluent half of the country has seen life expectancy rise far more rapidly than the lower half.  Will used the former statistics to argue for raising the retirement age.  Krugman used the latter statistics to argue that raising the retirement age would be regressive policy.

At minimum, all this suggests that one "fix" to Social Security (which actually needs less fixing than a lot of other things, but never mind that for now) would be to lift the cap on incomes that pay into the retirement portion of FICA.  But I can't help but think there is something to what Will says about life expectancy--I really see no reason why people with cushy jobs and long life expectancies shouldn't retire at a later age.  I am just not sure how one creates a retirement policy that links retirement age to lifetime income without creating some really weird incentives effects.





Kamis, 26 April 2012

Apple is Not Sony

I'm not sure what I disagree with more, Forrester Research's glib prediction that Apple will be the next Sony (link), or the assumption that it's even possible to predict something that complicated.  Let me start with the second issue.

The longer I've been in the tech industry, the more I've come to realize that predictions about it are usually worthless. 



Leave aside the big failed dreams like nuclear-powered aircraft (link) and the transatlantic train tunnel (link).  Even products that seem relatively straightforward can be very hard to predict.  The industry thought tablets and e-books were imminent for at least a decade before someone got them right, and we're still waiting for micro fuel cells and flexible screens.

There are so many moving parts in the industry, and success depends on so many tiny details of execution, that it's basically impossible to predict even things that look, in retrospect, like they were inevitable.

If it's that hard to predict the fate of individual technologies that have been studied for decades, imagine the difficulty of predicting the fate of an entire company made up of thousands of people and numerous product lines.  What you can do is predict what could happen, and even take a guess at the odds.  We've all been collectively doing that lately with RIM and Nokia.  But even to make that kind of prediction you need to look at companies' management, products, customer base, financial status, and technologies, plus do an assessment of its competitors.  Forrester did none of that for Apple.  Instead it drew a simple little equation, based on sociological theory:  Apple was led by a charismatic founder, as was Sony.  After Sony lost its charismatic founder, the company declined.  Apple has now lost its charismatic founder, so it'll decline too.

Forrester is an excellent research firm, and I have huge respect for its quantitative market research.  But in this case I'm not buying its prediction, for a couple of reasons:

First, although it's accurate to say that Sony declined after the loss of Akio Morita, it's not clear that the company's decline was caused solely or even primarily by the loss of Morita.  Here's a chart from Yahoo Finance of Sony's stock price since 1985:



The red arrow marks 1994, the year when Morita stepped down after suffering a stroke.  Ignore the ridiculous spike in the middle caused by the Japanese economic bubble; the important point is that at its peak in 2007, 13 years after Morita left the company, Sony's stock price was double what it was when he left.  The PlayStation, Sony's most vibrant tech product today, was started under Morita but is generally credited to Ken Kutaragi and his sponsor Norio Ohga, the man who succeeded Morita.

I have no doubt at all that Akio Morita was central to the building of Sony.  But I think its decline stems from a lot more than just his departure.

In a similar vein, I am not at all persuaded that the success of Apple under Steve Jobs can be credited entirely to his presence.  I worked there for almost all the time he was gone, and Apple without Steve had a lot of strengths -- a strong engineering team, a strong product management culture, great industrial designers and artists and marketing gurus, and a beloved brand with fanatical users.  What the company didn't have, I think, was leadership capable of making all those strengths mesh.  Some of Apple's work was wonderful (the Macintosh II and the PowerBook computers come to mind), and some of it was completely forgettable.  Management was not able to get the company consistently united around a single set of long-term goals.  Instead the company lurched from initiative to initiative, some of them pushed by outside consultants, many underfunded or contradictory.  Apple's culture of passive resistance, created in part by Steve Jobs himself during his first time at the company, made the problems worse.

What Jobs brought to Apple when he returned, more than anything else, was focus.  He committed Apple to a relatively narrow set of initiatives, and made sure everyone in the company got behind them.  That let Apple's existing strengths shine through to the market.  Jobs was able to rescue Apple because it was only partially broken.

Forrester's article depicts Apple under Jobs as a company of followers who waited to be given their marching orders from on high.  That theory sounds reasonable if you don't know anyone who works at Apple, but I do.  The folks I know there are team players, but by no means are they passive followers.  I think the real risk is not that Apple without Jobs will drift, but that it may revert to its old bad habits.  Will the company's management team continue to work together, or will it fall into passive resistance?  Can Tim Cook enforce discipline without alienating the big talents (and big egos) scattered throughout the company?  Do the managers themselves recognize the need to cooperate in order to keep Apple on top?

Forrester can't know the answer to that question.  Neither do I.  Yes, at some point Apple will decline; nothing lasts forever.  But unless somebody develops the ability to read minds, we can't predict when Apple will come apart.  And in the tech industry, if you don't know when, you don't know anything.

=====

If you'll forgive me for a brief commercial message, I wanted to let you know that we just de-cloaked Zekira, the software project that I've been working on for more than a year.  Zekira is an app that helps you recall the context around any bit of information in your life -- a name, meeting, file, etc.  You use it to answer questions like "how do I know this person?" and "what's the context for this meeting?"

Zekira runs on Mac and Windows, and is in early beta.  It's aimed at busy professionals who are overloaded with more computer information than they can keep track of.  The more that you save old files, messages, and contacts, the more Zekira can do for you. 

You can learn more about Zekira at our crowdfunding site: www.indiegogo.com/zekira   In exchange for a donation to the project, we're offering everything from beta access to Zekira to a unique "first-come, first-served" opportunity to place display advertising in Mobile Opportunity.

Rabu, 25 April 2012

The National Association of Realtors misrepresents how many people use the Mortgage Interest Deduction

An NAR Spokesperson says:

“NAR is actively engaged to ensure that the nation’s 75 million homeowners will continue to receive this important benefit, and we will remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest.”
The problem is that not all homeowners use the mortgage interest deduction.  Those without debt don't use it.  Those who don't itemize don't use it.  According to the US Treasury Department, in 2009, only about 37 million households took the mortgage interest deduction.

NAR is in the business of representing its members, who benefit from the mortgage interest deduction.  But they still need to get their facts right.  


(For data on number of returns with deductions, go to the SOI site, scroll down to "Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items," choose 2009, and look at column CA in Table 2.1).

Minggu, 22 April 2012

Has the Variable Rate Mortgage saved the European Mortgage Market?

Just as in the United States, many European countries have had large run-ups and crashes in house 
prices. Consider the data from the European Central Bank below: one sees in particular large price increases and declines in Spain and Ireland.

Remarkably, default rates in Ireland and Spain in 2009, while high by historical standards at 3.6 and 2.9 percent respectively, were substantially lower than in the United States, where the default rate was 13 percent (see Fiorante and Mortgage Bankers Association of America).  Dwight Jaffee has argued that this difference in performance is the result of the fact that mortgages in Europe give lenders recourse to the borrower.  I find it plausible that recourse matters, but not that it matters quite so much.  For example, while purchase money loans in California are non-recourse, refinance loans are not.  The preponderance of mortgages in California are refinance loans, and California's default rate is extraordinarily high.

So why haven't borrowers in Spain and Ireland defaulted more?  According to the European Mortgage Federation, more than 80 percent of loans in Spain and Ireland are variable rate mortgages.  As a consequence, as market interest rates fell, so too did mortgage interest rates.   The typical mortgage borrower in Ireland and Spain is currently paying considerable less than 4 percent on their mortgage.

s
 This has almost certainly been beneficial to Europeans, and suggests that robust TARP 2 program, where underwater borrowers can refinance their loans at lower interest rates, could help mitigate default.  On the other hand, as interest rates rise in Europe, we might have reason to become very, very concerned about defaults there in the months to come.

Selasa, 17 April 2012

The Two Faces of RIM

At the risk of turning this weblog into the "BlackBerry channel," I wanted to add a couple of additional thoughts to my post on Research in Motion's recent earnings and strategy announcement (link).  There was an interesting divergence in the press and analyst comments about Thorsten Heins' statement that RIM would refocus on enterprise customers.  Commentators in the US and Canada generally responded to it fairly well, while those in Europe and other parts of the world were a lot more negative.

I think that's because there are really two BlackBerry customer bases, one in North America, and one in the rest of the world.  I wrote about this a year and a half ago (link), but I didn't think about how it related to RIM's earnings situation, and neither did a lot of other people.

To summarize, in North America, where RIM first came to prominence, its products tend to be seen as business tools.  They were first adopted by businesspeople who had a strong need for up-to-the-minute communication, including Wall Street traders and government officials.  As a result, RIM's image and core customer base in North America has always focused on business professionals.  The reality was more mixed; RIM did reach some non-professional users in North America, aided by operator marketing campaigns that included a memorable T-Mobile TV ad that praised the benefits of a BlackBerry flip phone designed to prevent "butt-dialing" (link).  But the most popular smartphones for non-business consumers in North America tended to be the Sidekick, and later iPhone and various Android models.

The situation was different in the rest of the world.  BlackBerry came to market there later, and people in many countries were not as enamored of real-time e-mail as they were in the US and Canada.  In those countries, BlackBerry generally caught on as a low-cost youth messaging phone, aided by RIM's BlackBerry Instant Messenger service, which lets consumers see when their texts have been read.  The relatively low parts cost of a BlackBerry compared to other smartphones also helped RIM reach consumer-friendly price points.  In some countries, BlackBerry established a strong network effect among young people.  If everyone else in your social group has BlackBerry Messenger, you'll be completely left out if you don't use it as well.

As in North America, there are exceptions.  You can find business users of the BlackBerry anywhere in the world.  But I think it's fair to say that the average person in North America tends to see BlackBerry as a professional business product, while the average person in the rest of the world tends to see BlackBerry as a youth consumer product.

This explains the differing reactions to RIM's announcement.  Observers in North America (including me) tended to view it as a long overdue refocusing on RIM's first and most loyal customers.  Observers in other parts of the world tended to view it as a thick-headed betrayal of RIM's fastest-growing customer group.

Some of the reactions outside North America were very acerbic.  My favorite came from Andrew Orlowski of the Register (link), who noted the irony that RIM had made its announcement "with the English rioting season fast approaching."  Yes, he was that upset.

So which group is right?  I think they both are; it just depends on which face of RIM you see around you.  Both sides of RIM have a core of loyal customers, but both sides also have risks.  In North America, I think business users are largely saturated with smartphones, and this is where RIM's business has been losing the most share.  On the other hand, these customers produce the highest gross margins when happy, and they are not being targeted heavily by other smartphone companies.  In the rest of the world, RIM's base is younger and growing faster than its North American business base, but it's hard to picture BB Messenger competing successfully in the long term against social messaging through sites like Facebook.  RIM might be able to maintain BBM as a standard by licensing it to other phone companies, but that would destroy the differentiation of the company's hardware, leaving it to compete on raw price against Android licensees like Samsung and China, Inc.  I'd rather walk on razor blades.

So I can easily make a case for focusing on either one market or the other, with the idea being that if you work very hard you can at least hang onto part of your current base, giving you a foundation to grow from in the future.  But it's not clear that RIM is ready to make that sort of apocalyptic choice.  Instead, it sounds a lot like a company that wants to ride two horses at once.

A small group of observers said Heins' comments about enterprise had been taken out of context, and that it was important to listen to all of RIM's conference call, something that many people apparently didn't do at the time (including me, I am ashamed to say).   So I went back and reviewed the full transcript of RIM's call (link), and here's what I think I read:


"We plan to refocus on the enterprise business and capitalize on our leading position in this segment." 

RIM did definitely say that it's re-dedicating itself to serving enterprise customers.  But I am not clear on whether that means serving IT managers or individual business users (or both).  As I mentioned in my previous post, that is a big difference.  Individual business-oriented users are a segment; they will not go away.  And anyone who thinks those users all want to play games and listen to music on their smartphones is out of touch with reality.  But IT as a major channel for smartphone sales is waning.  Although focusing on IT might be a good tactic to preserve some short-term revenue, it's not a long-term strategy for the whole company.


"Other products competing in the bring-your-own-device segment is to create a compelling consumer offering. We believe that BlackBerry cannot succeed if we try to be everybody's darling and all things to all people. Therefore, we plan to build on our strengths to go after targeted consumer segments, and we will seek strong partnerships to deliver those consumer features and content that are not central to the BlackBerry valuable position, for example, media consumption applications."

So RIM did say that it's backing away from some investments on the consumer side.  But that does not mean it is abandoning its young users.  I think Heins is hinting that RIM will focus on messaging phones and use software licensing to give those phones media playback and gaming features.  Outsourcing is a typical tactic that tech companies use when in financial trouble.  Sometimes outsourcing actually does save you money, and sometimes you find that licensing and integrating the third party software costs you about the same as building it yourself.  So I don't know how well that will work out for RIM, but it doesn't necessarily mean they are dumping the consumer market.


"Another key area where we will be making significant change is in our services business. Here, I'm referring specifically to the consumer-oriented, value-added services business that we have attempted to build over the past 2.5 years through numerous various acquisitions....The heavy ongoing investment required to continue this initiative does not make sense given RIM's current market position and our relative strength. As a result, we will be looking at ways to scale back these activities and refocus resources on developing an integrated services offering that leverages RIM's strength, such as BBM, security and manageability."

This is the place where Heins definitely signaled cuts.  It sounds ominous for Gist and Tungle and the other mobile web startups RIM bought in the last couple of years.  I hope they're not all being thrown out, since I believe they could help to differentiate RIM's products, but recent acquisitions are often at risk in corporate restructurings because they are not viewed as part of the "core product offering."  (Just look at what happened to Palm.)  Besides, they do not usually have big revenue forecasts attached to them, so they can be cut without forcing a drop in the corporate earnings forecast.


Reading RIM's comments closely, it sounds like they're saying they want to preserve both their business user base in North America and their youth messaging base in the rest of the world.  That's sensible from a revenue preservation standpoint, but it means that RIM will continue to be serving two masters with very different needs.  Compare that to Apple, which basically makes one smartphone at a time.  It will be hard to cut a lot of engineering cost at RIM, and it will be very difficult to create products that please both North America and the rest of the world, especially if RIM tries to add some significant new differentiators.  Features that please its North American core are not likely to also please the international market, and price points that would be acceptable in North America will likely be too high for the rest of the world.  The danger is that RIM will be like an army fighting on two fronts, with its forces below critical mass on both sides.

For RIM, this is yet another layer of challenge and uncertainty on top of what was already a very challenging situation.  Although customers may be glad to hear that RIM's not abandoning either group, to me the two faces of RIM make its situation even more daunting.

Senin, 16 April 2012

THE WIZARD OF ‘WOZ’

WOZNIAK IS THE OFT-FORGOTTEN CHAPTER IN THE CHRONICLE THAT DOCUMENTS THE FIRST FEW EXPERIENCES THAT MADE THE LATE STEVE JOBS THE GREATEST CEO AND MARKETER OF THE PAST CENTURY. HE IS THE OTHER ‘STEVE’ – THE ENTREPRENEUR WHOSE STINT AT APPLE IN ITS FIRST DECADE HAS MANY A LESSON FOR MODERN DAY ENTREPRENEURS TO LEARN FROM

“A true entrepreneur doesn’t start with all the money in the world. When we started Apple, we had golden ideas but no money. That is true entrepreneurship...” Steve Wozniak

Besides being referred to as one of the co-founders of Apple, much is not talked about Steve Wozniak. In the present times, all that most know about him, if at all, is that he stays as of now in Los Gatos.

There are entrepreneurs who walk with a vision that stretches out into generations. Then there is the most unbelievable cult of visionary innovators who walk with an idea to create temporary monopolies and break march the second they feel they are done with their current experiment and that the lot of leaders whom they trained can handle the war well. Woz incredibly belongs to the latter group, ready to live an entrepreneurial dream purely for the sake of his passion than for anything else; and ready to hit the road in search of the newest entrepreneurial high every moment.

When Janet (Woz’s wife) first wrote back to my office last month, Steve was putting up at the MGM Grand in Vegas, and had just completed a nine hour-long drive from Gilroy (California) to Vegas. “Right now, his schedule is so full with travel and speeches,” she said. He was there on a quick break before his packed season was to kick-off. His diary for the next five days included two days of driving and three days of judging high-school robotics in Nevada. In the past half-a-month, I had tracked this multimillionaire through more than a dozen destinations across three countries, where he had been delivering speeches at educational institutions, sharing his vision with young entrepreneurs, egging on the innovation spark in budding minds – in short, the man was firmly and passionately embedded into sharing all that he knew with all the people around him that could benefit. I cannot imagine a more altruistic form of entrepreneurship – where a professional, without any qualms, gives up all the cards that he holds to help the other guy, whoever, win. A true teacher!

Over the time that I researched him, Woz’s answers to my queries made me realize that behind the geek who was technically ‘the’ creator of Apple’s computers during the 1970s and 1980s, lies a legendary entrepreneur who doesn’t like hogging the limelight. He never did. And from Woz, what I believe is the primary CEO-nurturing lesson that true entrepreneurs of the modern age should internalize is – encourage and spearhead the ideation processes and initial stages of product-making, and once you’ve found your optimally utopian CEO (or one who comes closest to that), give complete independence to your CEO to finally shape, market and sell the produce. Even if you’re gone tomorrow, your CEO and his successors should be trained well to adopt the company as his and take it forward responsibly – with shareholders to serve. Shy but determined, Woz was a creator of many-a-marvel, and the independence that he gave Jobs in executing the selling and marketing strategies is what I believe gave the primary cementing foundation to Jobs’ character and in Jobs becoming the greatest marketer and CEO in the world. And this effect had started much before Apple was even born (to be precise, five years before, with the invention of the ‘Blue Box’ – an instrument to make free calls – which these two tech wizards made; I’ve given more details later).

In Jobs’ biography (‘Steve Jobs’ by Walter Isacsson), recalling his first interaction with Woz, while sitting on the sidewalk in front of Bill Fernandez’s home (Woz’s Homestead High School friend), Jobs had concluded: “Woz was the first person I’d met who knew more electronics than I did. Woz was very very bright.” He was. He is still. Very.

Woz’s father (Francis) was a rocket scientist at Lockheed Martin, and a proud passout of the California Institute of Technology. Since he was a child, Woz would spend hours gazing at circuit diagrams and enjoy hearing about the power of transistors and diodes from his father. While in the fourth grade, Woz made an intercom system, connecting his friends’ bedrooms in six households in the neigh-bourhood. He started making calculators when he was in the eighth-grade. And by the time he moved to the penultimate year of high school, he had started played pranks with his creations. Such was his madness when it came to experimenting with new electronic equipment that he was even sent to a juvenile detention centre for scaring his school principal with a fake electronic bomb. His excitement didn’t bend before law. In the one night he spent there, he taught fellow prisoners how to conduct electrical current on to the prison bars!

He was born a hardware guy, and though his pranks were not marketable, they were definitely signs of a genius entrepreneur-inventor in the making.

If a film could be made, the two Steves would have unique titles. While Woz would be the Entrepreneur-Creator-Ideator, Jobs would be the CEO-Innovator- Marketer. For many years, the duo worked together, but at every stage until Woz left Apple in February 1987 (he ceased to be a full time employee at Apple a year after Jobs was forced out of the company), Woz played the role of the visionary creator, while Jobs acted his part of being the visionary marketer to the hilt. That Jobs was under no undue pressure from Woz and acted on his independent will as the master marketer and head of the Macintosh division for Apple is apparent from not just the manner in which product creation and selling were masterminded independently by Woz and Jobs respectively during the first 12 years of Apple (when the two worked together) but also by the manner in which the advent of John Sculley as Apple’s new Chief in 1983 disturbed Jobs’ independent psyche, so much so that Jobs organised a boardroom coup to oust him [The coup backfired].

The Blue Box: The first revenue-generating product that the duo created was the Blue Box (September 1971), which replicated tones that routed frequencies on the AT&T network thereby enabling callers to make toll-free calls across the world. Woz masterminded the product. He got the idea from a magazine article, and turned it into a potent mix of mischief, oscillators, and wizardry. From calling the Ritz in London to speaking to a bishop at the Vatican at half- past-five in the morning, both the entrepreneur and the master marketer got their product tested. Then it was time to mint some money. Jobs, true to the marketing stamp, decided the pricing of the Blue Box. Woz allowed Jobs to experiment his pricing skills and bloom as a marketer during those early years. [Remember: Woz was 21 years old and Jobs was only 16 then.] The cost of making one unit was $40, therefore Jobs decided that they should sell it at $150 to make good profits. They sold about 100 pieces and made net profits to the tune of $11,000 – big moneys for a start. Lesson #1: As an entrepreneur, if you find your CEO competent, even if his age is lower than the industry standard, trust him. Of course, there will always be stock taking sessions – but these should neither be oppressive or daily.












Success #1@Apple: In early 1975, after Jobs returned to US from his soul-searching trip to India, Woz and he got back. During one of the meetings at the Homebrew Computer Club which Woz attended on the evening of March 5 that year, he saw a demonstration of the Altair 8800 (a microcomputer design based on the Intel 8080 CPU design). The circuit layout of the microprocessor gave Woz an idea to create a personal computer. He recalls, “This whole vision of a personal computer just popped into my head. That night, I started to sketch out on paper what would later become known as the Apple I.” The enterprising Woz, on his own, had masterminded the creation of the world’s first personal computer. Says he, “Usually, entrepreneurship involves creation and engineering. Bright engineers get ideas and become entrepreneurs to bring them to fruit.”

On June 29, 1975, the first prototype of the Apple I PC was done. What next? It was the free-spirited Jobs’ turn to take responsibility of raw materials procurement and sales thereafter. He sourced some Intel chips (for free!) and gave presentations to clients on behalf of the shyto- talk Woz. Interestingly, had Woz gone ahead with the selling act, he would have sold-off all units of the Apple I for free! He wanted to. Says the true to nature altruistic Woz, “The theme of the [Homebrew Computer] club was ‘Give to help others’. I designed the ‘Apple I’ because I wanted to give it away for free to other people.” Jobs certainly wasn’t one to endorse the entrepreneur’s idea of philanthropy. He was a CEO and marketer with an overwhelming understanding of his business’ potential.

Steve Jobs sold the Apple I at $666 a piece – a margin of over $300 per piece. Their first order was 50 units from the Byte Shop in California.

Success #2@Apple: The Apple II went on sale on June 5, 1977. Like the previous version, this one had Woz’s touch of brilliance. He had designed it keeping in mind the evolving needs of Apple PC users. The Apple II had better colour and sound, storage capabilities, a faster microprocessor and became a best-seller.

Its sales rose from 2,500 units in 1997 to 210,000 by 1981, the year which practically was Woz’s last active year as an entrepreneur at the company. But the Apple II wouldn’t have earned fame had it not been for Jobs’ own touch of brilliance as a sales guy. This is what Isaacson writes in his book, “To make the Apple II successful required more than just Wozniak’s awesome circuit design. It would need to be packed into a fully integrated consumer product and that was Jobs’ role.”

With the Apple II, Jobs put his father’s advice (of making even the unseen parts in a product look perfect in terms of craftsmanship) into practice. Then there was the marketing expenditure, which Woz allowed Jobs to go ahead with. It was the first West Coast Computer Fair in April 1977, and Jobs wanted to grab the booth right opposite the hall to make an impact. That cost Woz and Jobs a huge $5,000. Woz didn’t stop him. Woz thoroughly know that having a great product wasn’t even half the job done. One had to convince people to buy it. It worked. Exemplifying this thought process was what ensured that Apple II sold almost 6 million units for the next 16 years.

Lesson #2: As an entrepreneur, never fall into the trap of believing that the best product can win purely on quality. That almost never happens. Believe in the power of advertising and marketing, fanatically.

Of course, all this doesn’t mean that one can’t disagree at the top. Even when it came to execution and people management, Jobs was particularly stubborn, as Woz says, “Steve was too tough on people. I wanted our company to feel like a family where we all had fun and shared whatever we made.”

After surviving a private plane crash in 1981, it was only in 1983 that Woz returned to Apple. This time however, he sensed the change in Jobs’ orientation towards work. Woz tells us, “Steve was one of the greatest. He didn’t do the engineering but he understood it better than pure business types. I was his ‘key’ in the early days. In later times, it was clear that he had understood the importance of all the departments of a large company. From then on, Steve became a great CEO but it wasn’t the same. That’s why it’s confusing as to whether the word ‘entrepreneur’ applies to this latter phase [of Jobs].”

Woz stayed with Apple till 1987. In the between, he earned his undergraduate degree in 1986 from UC Berkeley under the pseudonym “Rocky Clark” (Rocky being his dog’s name and Clark his former wife’s maiden surname). Post that, he tried his hands at encouraging technological start-ups, and still continues to do so. He has been quite successful with ventures like Acquicor Technology and Fusion-io. Woz’s close association of a decade with Jobs was critical in making Steve Jobs the great visionary CEO and Marketer. Woz was the cushion with brains and a creative acumen, Jobs was the hedge-hammer with a love for profits, and making ordinary objects beautiful and sellable.

Chances are, had Woz continued playing the seasoning role on Jobs, Jobs wouldn’t have had the bitter Sculley days in his biography. But that clearly wasn’t to be, because Woz was an entrepreneur who loved to break march as soon as his initial idea had won trust. He wasn’t the one in it purely for the love of money – and when he had had his share of the happiness quotient, he moved on! Whatever said and done, Woz’s association with Jobs was meant to be just that long.

If you ever chance upon him walking through Blossom Hill Park with his two pet dogs (which he does quite regularly whenever he is home in Los Gatos), or getting his hair made at his favourite ‘Curl Up and Dye’ salon at Gilroy, you’ll never suspect that he’s the co-founder of the world’s most valuable company – that’s how down-to-earth he is.

Respect is what we must give him, for choosing passion over money, choosing life over fame. This is why he walked away from Apple. In a decade since Woz and Jobs started Apple, the company’s sales had risen to $346 million by 1987, and Woz would have known that sticking around would not only keep him on the headlines of media outlets but also get him more money than one could have imagined. But he did walk away.

Lesson #3: Always choose passion over money; success will be longer lasting and more satisfying.

I might not have been able to do that myself. Perhaps the only commonality between Woz and me is our choice of music – he loves listening to Dylan and Counting Crows; so do I. For trivia’s sake, he still is an owner of Apple apart from getting around $125,000 a year as an employee – which is peanuts given what he’s worth as a person; for me, his character is worth more than all the trillions that one could churn up in market capitalization!

He’s the cult entrepreneur all CEOs should listen to, to get their bearings sparklingly right. Well, there are some things that money just can’t ever buy – Woz is at the top of that list.

I like Romney's "secret" policy plan of the day.

Cutting back tax deductions (and especially the deduction for second homes) for the affluent?  What a good idea!

Jumat, 13 April 2012

Thomas Phillipon asks why financial services are so expensive (h/t Tim Noah)

An abstract:

Despite its fast computers and credit derivatives, the current financial system does not seem better at transferring funds from savers to borrowers than the financial system of 1910.

Phillipon notes that while finance has grown rapidly as a share of GDP, stock prices have become no more informative of future cash flows, and risk sharing has not improved.  But as Paul Volker might say, at least we have the ATM now.

Kamis, 12 April 2012

Mixed feelings about falling e-book prices

Amazon's cutting of e-book prices is a good thing for consumers.  But...

Here in Pasadena, there survive independent bricks and mortar book (Vroman's) and music (Canterbury's) stores.  It is great to have them around, because browsing is fun.  I spend more than I have to for books and cds because I want them to stick around (sort of like public radio, I guess).

Nevertheless, I have a Kindle, and I buy stuff from Amazon too, because of (1) convenience and (2) inventory.  Vroman's  is great, but it can't stock everything.  When I want to read something, given the choice between waiting for a special order  or waiting for some electrons to arrive, I will take the electrons.  When I travel, I find that electrons are lot lighter than books too.

Hence it is not price that drives my purchasing decisions, but I am enough of an economist to know that prices drive the decisions of most others.  If that price gap between Amazon and Vroman's grows even larger, I am not sure how Vroman's survives.  Pasadena without Vroman's is not quite as nice a place as Pasadena with Vroman's.


Selasa, 10 April 2012

How apartment rents and vacancies can rise (or fall) simultaneously

We at the Lusk Center put out the Casden Forecast for apartment economics in Southern California every spring.  When we put out our San Diego numbers last week, we presented a result that confused people--we expect both rents and vacancies to rise in the next year.

The reason this can (and often does) happen is that real estate markets operate with lags, and feature "natural" rates of vacancy.  The "natural" rate is the rate at which real rents stay constant--if vacancies fall below the natural rate, real rents rise; if they rise above, rents fall.  Stuart Gabriel and Frank Nothaft did a nice paper on this some time ago.

Consider a tinker toy model of rents that is characterized by two equations (the ts in parentheses are subscripts for time):

Vac(t) = Vac(t-1)+(Rent(t-1)-1)*.05

and

Rent(t) = Rent(t-1)-(Vac(t-1)-.05)*Rent(t-1)

So when rents fall below $1, absorption picks up, otherwise it falls; the natural vacancy rate (the rate at which real rents rise or fall) is 5 percent.  This produces the following picture of rents and vacancies:



As one can see, this simple model shows periods where rents and vacancies rise and fall together.

Of course, this is all in real terms.  When there is inflation, nominal rents can rise even when the vacancy rate is above the natural rate, because rising nominal rents are masking real falling rents.  

Rabu, 04 April 2012

When government is the solution

Having spent the past month in a country where one always has to be careful about what one eats and drinks, I have a renewed appreciation of first rate sewer and water systems.  Such things require
governments.

I can imagine, however, that there are people of a certain stripe would would argue that clean water and good public health should no more be fundamental rights than, say, broccoli.


Senin, 02 April 2012

Rebuilding RIM

There's something sick about our love of disaster movies.  We take pleasure in seeing great works of ego laid low -- that unsinkable ship is going down, the fireproof skyscraper is going to burn all the way to the top.  I think many observers are now watching Research in Motion like a disaster movie: It's too big to ignore, too sick to survive, every quarter is a new plot twist of devastation.  Some of the press coverage is taking on a mournful air of inevitability:

"RIM weighs bleak options," says the Wall Street journal (link).  The article quotes a customer as saying a recent meeting with RIM officials was "like going to a wake." 

But the reality is that RIM's future is not yet decided.  Definitely the odds are against it.  But well-known brands have an amazing ability to come back; people are almost always willing to give them another chance.  (Check the history of Packard Bell, a 1920s radio brand that came back as a 1980s computer brand.  Heck, you could probably revive Palm if HP took its cold dead hands off the thing.)  RIM's fate depends on a huge number of unpredictable details, some of which haven't even happened yet, and others that we don't know because we're not company insiders. 

So we can't predict what will happen to RIM, but we can talk about what the company needs to do to survive.  If nothing else it's an interesting case study for anyone who needs to turn around a tech company.


Step one: Acknowledge the problem in public

One of the smartest marketing people I ever worked with is Christopher Escher.  He was at Apple for a long time, and then served in the early days at Google.  Chris said that the process of rehabilitating a company's image was like moving the hands of a clock. Having a great image was at 12:00.  A company's image could stay in that position for a long time as long as it didn't have too much bad news.  But if bad news built up, the hands eventually slipped over to the 3:00 position, which meant you were perceived to be a troubled company.

Chris said companies always want to force the hands to go backwards to 12, because they want to get past the pain.  But his insight was that you can never do that.  First you have to acknowledge the problem (3 pm), articulate your plan (6 pm), and then show that you're making progress at fixing it (9 pm).  I think Chris had some other stages in there, but you get the general idea.  Only after you had taken all of the intermediate steps, and posted improved financials as a result, would people believe that you had actually earned your redemption and returned to stability at 12.


The business redemption clock, a concept by Christopher Escher.

A good example of this process in action was Stephen Elop's moves at Nokia after he became CEO.  The notorious "burning platform" memo, which I believe was deliberately leaked, acknowledged the problems at Nokia and made its later moves much more credible to the press and analysts.  That doesn't mean Elop made the right moves, or that they will work, but if he had denied there was a problem, people would not have even paid attention to his later moves. 

Until its earnings announcement last week, RIM was still trying to make the clock hands go back to 12, and it wasn't working.  All it did was convince people that management was out of touch.  When RIM acknowledged the depth of the problem, suddenly the tone changed in some of the coverage.  "RIM finally seems to get it," CNET declared (link). 

There is a downside to acknowledging the problem: you make it worse.  Remember the despair and disbelief that "burning platform" created among Nokia fans (link).  You frighten any customers who aren't already worried, and partners may delay or cancel their work with you.  As you'll see, this is a problem with many of the steps you have to take to fix a broken tech company -- the medicine makes you even sicker at first.


Step two: Focus

Almost by definition, a troubled tech company will be trying to create too many products and funding too many business initiatives, the leftovers from more optimistic times.  There isn't enough revenue to pay for all of them, so you have to eliminate some.  This is an agonizing process.  Usually there is current or forecasted revenue tied to every project (not enough revenue, but some).  So when you cut them, you don't just lower your expenses, you also reduce further your expected revenue.  That forces you to cut even more.

Companies often default to keeping their most profitable product lines, because that requires the smallest cuts.  "We're focusing on the core," the executives say.  But usually the most profitable product lines are the oldest ones with the worst growth prospects.  Focus on them and you'll lock the company into an irreversible decline.

The right way to focus is to plan from the bottom up.  Decide what you want the company to be, who the target customers are, and what special value you'll deliver to them.  Fund the projects that support that goal.  Everything else, no matter how valuable or emotionally important, is a candidate to be cut.  If those cuts don't reduce your expenses enough, revisit the goal and make it even more tightly focused, allowing you to kill more things.

This process forces you to slaughter sacred cows.  Steve Jobs returns to Apple, and decides the company will focus on making Macs for creative people.  Out goes Newton, out goes twenty years of painfully-assembled enterprise sales infrastructure, out goes the printer business.  Lou Gerstner decides IBM will be a services company; he kills OS/2, pulls its PCs out of retail, and preps that business for sale. 

RIM's focus is questionable at this point.  Thorsten Heins appeared to be very focused when said that RIM would "refocus on the enterprise business" because "BlackBerry cannot succeed if we tried to be everybody’s darling and all things to all people."  But the next day two RIM executives denied that the company was exiting the consumer market (link).

One of three things happened.  Either:

--Heins' remarks were remarkably badly scripted, and the company really doesn't plan to back away from the consumer market.  This would be a bad sign for the company's ability to execute.  How in the world could you botch a critical message like that in an important earnings call?  Get your act together.  Or:

--Heins really does plan to back away from the consumer market, but some others in the company are in denial about it and are trying to spin-doctor him.  This is unlikely since two executives delivered the same correction.  But I've seen weirder things happen.  Or:

--RIM plans to exit the consumer market but doesn't want to say so yet because it needs to sell all of its current products that are still in inventory.  I suspect that's the reality.  Shamefully sloppy marketing by RIM if tghey raised this issue without understanding the impact it would have on sales.  RIM needs to be crisper if it is to survive.

Messaging aside, the impact of a RIM focus on enterprise depends on your definition of "enterprise."  If RIM is planning to focus on top-down corporate sales through IT managers, good luck and goodbye.  The long-term trend is that IT has less and less control over the mobile device choices of users in the company, so RIM would be tying itself to a dying sales channel.  But if by "enterprise" RIM means it will focus on the needs of individual businesspeople rather than entertainment-hungry teenagers, that is RIM's best prospect for getting reasonable margins, and probably its best chance to survive.

Some of the diversity of reactions to Heins' remarks has been driven by commentators making different assumptions about the definition of "enterprise."  Roger Cheng at CNET assumed it meant business end-users, and praised the change.  On the other hand, Horace Dediu assumed it meant selling through IT managers, and was utterly dismissive (link).

The important question is what Thorsten Heins meant, and we don't know the answer to that. 


Step three: Get a win

The next step is to hold onto your installed base.  This is important for any device company, because your loyal customers are the nucleus from which you'll grow in the future.  No one else is going to hang out with you right now because you're damaged goods.  The base is especially important for RIM because they're paying monthly service fees to the company.  That high-margin revenue stream is critical to RIM's recovery, and must be maintained.  I was encouraged that even amidst all the bad news RIM still grew its subscriber base slightly last quarter.  I doubt that will continue, but if RIM can keep the base close to even, it'll help a lot with the future transitions.

This may be why the company was so sensitive to the idea that it would "abandon" consumers.  It's not the right time to send that message to the public, even if it is true.

Instead, you need to lavish love on the installed base.  That means giving them special discounts for buying a new BlackBerry, telling them how important they are, and getting them excited about the product's future.  They have heard those promises before, though, so to make it credible RIM needs some nice, solid new products.

I'm not saying killer products.  Those would be great, but since RIM was dysfunctional, I doubt there are killers in the pipeline.  At this point, it would be enough to ship a couple of very solid, well executed devices that deliver on RIM's expected value and don't crash.  Think of the role that the iMac played in Apple's recovery.  The device itself wasn't all that spectacular, but it was iconically Apple, and proved that the company was reconnecting with its values.  It engaged loyal Mac users emotionally, gave them a reason to believe, and put Apple back in the game.

So Heins should look at the devices in RIM's pipeline for the next six months, and focus everyone on implementing the few that look most promising on the core BlackBerry values of reliability, convenience, and great messaging.  Stop work on everything else.  It's better to have one or two wins than four mediocre products.  And stop producing a slightly different model for every mobile operator.  You can't execute well on that complexity; it's part of what got you in trouble.

Will this lose you some operators?  Yes it will, but it's better to have a smaller channel that is enthusiastic about your products than an overstocked channel that doesn't care.  (Again, look at the way Apple trimmed dealerships when it was working on its comeback.)


Step four: Create differentiation


Now you've focused the company and momentarily stabilized the installed base, or at least slowed its bleeding.  Next you need to add a few differentiators -- unique features that do things your customers will love and will drive them to come into stores and demand your products.  Create no more than three of these features.  You can't effectively advertise more than three anyway, so it's better to do three really well than to have six that kind of mostly work.

If you get these features right, your target customers will forgive dozens of other flaws in order to obtain the value of your differentiators.  This is what gets you off the hook for copying every feature of the iPhone, which you can't afford to do and won't implement well anyway (case in point, RIM's product history for the last several years).

What are those features?  I have some ideas, but a lot depends on which technologies RIM has in house and how talented its engineers and product managers are.  There are plenty of important unsolved problems RIM can tackle for businesspeople on the go.  Things like meeting planning, managing e-mails and text messages while you're driving, and finding parking in a crowded city might all benefit from RIM's integrated client-server architecture.  There are also plenty of opportunities to integrate BlackBerry uniquely with business infrastructure.  BlackBerry was first successful because it integrated so reliably with Microsoft Outlook and Exchange.  What could RIM accomplish if it applied that same sort of focus to Salesforce.com or Dropbox or LinkedIn?

RIM has the pieces to build some of these solutions -- it has bought a number of startups like contact manager Gist and calendar manager Tungle.  I hope those are being viewed as part of the solution rather than random acquisitions that now need to be tossed out.

You'll notice that I'm not saying anything about BlackBerry OS 10.  That's because it almost certainly can't be a differentiator, for several reasons:
--The first release of an OS is almost always focused on just making the basics work properly.  If BlackBerry 10 is stable and doesn't crash, that is probably the most you can expect from it.  Maybe OS 10 will let RIM announce that its phones now suck less, but that's not a differentiator, that's table stakes.
--Until very recently, RIM's main explanation for why it needed BlackBerry 10 was so it could match the multimedia and entertainment features of iOS.  If that has been the development focus, it's very unlikely that the OS has a lot to offer to businesspeople in its first version.
--The average customer does not buy an operating system.  In the tech industry, we pay a lot of attention to operating systems because we know they are important enabling technologies.  But what customers respond to is the features they enable.  When is the last time you heard someone say they bought a mobile phone because its OS did a better job of paging memory or scheduling symmetric multiprocessing?

What about the idea of RIM licensing out its operating system?  Forget about it.  First of all, I doubt there are any customers.  But even if they are, the distraction of serving the different demands of various licensees would tear the OS team apart. RIM just doesn't have the money and staff to make this work.  Its best play is to deeply integrate its OS, devices, and services to create unique systems.  That sort of stuff is hard for Android to copy, and challenging even to Apple.


So those are the four steps:  Acknowledge the problem, focus (and cut brutally), find a quick win, and create differentiation.  Each step sounds fairly straightforward, but the hard part is that you have to get them all right, and you have to do them fast.  It's like doing brain surgery on yourself while driving your car down the freeway at 60 miles a hour.  Any mistake can be fatal.

The most difficult steps are the third and fourth, finding a quick product win and creating differentiation.  Typically a major new product or differentiator takes 18 months to implement, even if you're moving fast.  I think RIM probably has six months to roll out a product win, and at most 12 months to show some major new differentiators.  Go beyond that, and the installed base may be draining away faster than you can refill it.  When Steve Jobs returned to Apple, he was lucky that the industrial design team that created the iMac was already in place.  We'd better hope there are some great half-completed projects in the labs at RIM that Heins can focus the team on. 

What to watch.  It's because of uncertainties like this that no one can predict if RIM will survive.  But there is a metric we can watch to assess the company's chances: cash.  Cash to a device company is like altitude to an airplane. When a device company fails, it's usually because it runs out of the cash it needs to build inventory and advertise a new product release.  RIM currently has about $1.8 billion in easily-available cash, down about $300 million from a year ago.  Net income was $1.1 billion.  For comparison, in 1997 Apple lost $1 billion and had $1.5 billion in cash left.  Eighteen more months and it would have been dead.

So RIM is not as acutely sick today as Apple was in 1997.  But the BlackBerry base is not as loyal as the Mac base was, and Thorsten Heins isn't Steve Jobs.  The danger to RIM isn't an instant collapse, it's an accelerating decline into irrelevance.  That decline may already be irreversible.  If it isn't, RIM needs to act urgently to turn it around.  Acknowledging the problem is a good (if belated) start, but the hard work is still to be done.