The Baby Bills Are Back

Posted on October 5, 2010 by Charles Fitzgerald

First it was Forbes, and now Goldman Sachs is raising the idea of splitting up Microsoft.  When the Department of Justice proposed splitting Microsoft asunder, the company resisted it tooth-and-nail.  Ten years later, it isn’t a crazy idea and could be done on Microsoft’s terms.  It might just be the best way to unlock value in the company (Goldman points out the company has a –8% annual return on a dividends-reinvested basis since 2002).  So why not divide it (and the accompanying mountain of cash) up into multiple companies and distribute equity in each to the shareholders (of whom I am still one).  Faster growth businesses will merit higher multiples, cash cows can focus on distributing cash and comps with other companies will be easier.

Microsoft today is a sprawling software conglomerate spanning everything from ephemeral celebrity gossip to plumbing resident deep in the bowels of the enterprise.  There are cost efficiencies to having all that under a single roof, but there is less and less evidence of product synergies as the company struggles in multiple markets.  The company may simply be too big to coordinate and synchronize effectively across individual businesses (and has been for a long time).  The strategy tax burden grows with overall size.  For years teams have been trying to minimize any dependencies across the company.

Office would be all over the leading smartphones and the iPad if not joined at the hip to Windows.  Products like OneNote are a waste of time in this day and age without broad and ecumenical device support.  Windows and Windows Live are hampered from encroaching upon Office and Exchange, even as their competitors do so.  Azure’s operating system and programming model choices largely mirror Server and Tools’ offerings.  And Server and Tools would be both more multi-platform and get more credit for existing multi-platform support outside of the Windows orbit.  It has taken mobile over a decade, and it has required an existential crisis, to shake off the Windows desktop baggage.  The complexity of the business results in too much energy going into internal positioning and coordination as opposed to customer value.

You could get as many as six companies out of Microsoft, three of which would be over $10 billion in revenue, a fourth (Xbox) is about half that and the other two around a billion apiece.  So these aren’t tiny businesses that lack scale to stand on their own.  Forbes proposed just three companies (Windows, Office and Web) and Goldman is timidly raising the idea of a consumer business spin-out.  If I were doing it, I’d create six companies:

  • Windows Corporation (Nasdaq: PCOS) – this is the first of the ten billion dollar plus behemoths and a cash-generating machine.  They need to focus on the tablet threat and decouple from the power-hungry Intel.  I’d put Windows Phone here to encourage efficiencies at the base operating system level and a coherent scalable Windows strategy.  Windows Live is the cloud services play.
  • Office Corporation (Nasdaq: CLPY) – behemoth number two is also a cash spewing machine that gets the productivity suite plus Exchange and SharePoint.  BPOS and Office Live are the cloud services play.  They go device crazy.
  • Server and Tools Corporation (Nasdaq: BOBS) – the third behemoth and one with increasingly healthy profits could be part of Windows Corp. but better to have a standalone enterprise company that can focus on competing with Oracle.  One key decision would be whether to put Dynamics here to help compete with Oracle or could be better off being application agnostic (this assumes you can find some enterprise application vendors Oracle hasn’t bought).  You also could buy or merge this company with SAP.  STB gets Azure for its online play.
  • Xbox Corporation (Nasdaq: XBOX) – this is over a $5 billion business (there is some noise in the numbers from Zune and Windows Mobile/Embedded) but minimal to no profits.  Time to show it can stand on its own.  There is little technology synergy with the rest of the company.  Give this company a good chunk of cash to fund the next generation console (and Zune as a fabulous consolation prize).  The awesome Xbox Live is the service play and they can also go nuts across a broad variety of devices.
  • Bing Corporation (Nasdaq: BING) – give Bing a few billion dollars as a buffer and lets see if sinks or swims.  This group is actually doing a great job executing.  Microsoft is now the clear number two and most markets like at least two players.  Plus Google doesn’t look like they will close this market out with the 80-90% share once expected.  With Yahoo’s distribution in hand, lets see if the losses start moving soon in the right direction.  The defensive rationale for Microsoft being in the search business is to keep Google’s profit pools from being used to drain Microsoft’s own profit pools like Windows and Office.  Google might worry less if there is no overarching Microsoft threat. 
  • MSN Corporation (Nasdaq: ADHOC) – you could combine this with Bing to have a single online company, but I think it is better to have a standalone entity that is portable in the coming portal consolidation game with AOL and Yahoo.  Give up MSN for the search distribution.

The Baby Bills (Svelte Steves?) are welcome to do deals with each other reflecting both legacy and new relationships.  You don’t give each company a copy of all the source code as the DoJ had proposed, but both Windows Corp and STB Corp would get a snapshot of the Windows code (and maybe also the development tools).  The sales forces are largely segregated already except for the broad enterprise-facing field which serves multiple businesses today so will require some careful partition.  The company has multiple campuses already and hosters have proven it is easy to operate datacenters with multiple tenants (you could even spin the datacenters as their own company and get all that capital off the new balance sheets).  It would be a distraction for a year but I think the benefits of greater management focus, a strategy tax cut and a more motivated workforce would more than make up for it.

And for those whose reaction to this missive is to viscerally defend the status quo, do you think the whole of Microsoft is greater than the sum of the parts today and what is an alternative to restore confidence in the company’s future and move the needle on the stock price?  I’d love to see Microsoft recapture the energy, ambition and success of yore, but scale and complexity seem like some of the biggest impediments.  And maybe Mini-Microsoft can change to Multi-Microsoft.

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So Who is Giddy About Windows Phone 7?

Posted on October 4, 2010 by Charles Fitzgerald

Windows Mobile is a dinky business for Microsoft but it has assumed a much greater symbolic role as a lens to judge the company’s future prospects and its ability to compete outside of the traditional PC business (the inexplicable lack of a Windows tablet is more significant as the iPad is cannibalizing laptops but doesn’t seem to have the same level of external fixation). 

This means great scrutiny for the upcoming Windows Phone 7 launch.  Microsoft is ramping the marketing machine (including a parade) and promising nine or ten figures of marketing spend.  There is never a good time to be flat on your back in the market, but Microsoft picked a particularly bad time as the Windows Phone 7 delivery woes have coincided with the phenomenal growth of both Android and iPhone, but they’re ready to reengage.

Perception-wise, just maintaining share will count as a loss for Microsoft, so it is going to take more than just a solid product launch.  Windows Phone 7 is going to have to light some people up with excitement to be successful.  There are four constituencies I’m watching for signs for giddiness.

Smartphone OEMs

There are a decent number of OEMs committed to shipping phones running Windows Phone 7.  HTC, LG, Samsung and Sony-Ericsson amongst the traditional mobile phone manufacturers as well as more aspiring vendors like Dell, Garmin-ASUS, HP, Toshiba and Qualcomm (whose product plans are a lot fuzzier than the traditional guys).  Key questions to gauge excitement amongst OEMs:

    • Where is the Windows Phone 7 device in the OEM’s portfolio?  Hardware-centric mobile guys are pretty pantheistic, especially the Koreans who do one of everything.  Will Windows Phone be anyone’s lead device?  All the major mobile OEMs also do Android devices. 
    • How much hardware flexibility does Windows Phone give OEMs?  What hardware support got cut to get it out the door?  How many chassis (evidently that is the plural too) does it support? Can OEMs leverage their investment across a family of devices and differentiate themselves?  Obviously things like CDMA support have been pushed from the initial release.
    • Are the OEMs content to lose the ability to differentiate themselves with their own shells? (e.g. the HTC Sense UI).  Are there enough other opportunities for OEMs to believe they are differentiating themselves with Windows Phone 7?
    • Do OEMs see Windows Phone giving them more leverage with Google on the Android side or does it put their access at risk?
    • Will we see any surprise new OEM announcements?  e.g. Motorola, Nokia or RIMM?
    • Will OEMs get excited about paying for an OS again after a taste of Android?  Or is the license now just for patents rather than code?  There is a scenario where Microsoft makes more per Android phone than Google (who have own revenue challenges) via patent licenses.  The whole smartphone market is becoming a patent free-fire zone.

Mobile Operators

The operators are less important and have less control than ever before thanks to Apple’s trailblazing work but they can still mess up a launch with pricing, promotion (or lack thereof – think Kin or Palm) and the inevitable but self-defeating initiatives that get dreamed up in the name of not being a “dumb pipe”.  The operators are worse than PC OEMs when it comes to self-destructive and misguided “differentiation”.  Discerning operator giddiness is similar to the OEMs in terms of seeing where it fits in their overall portfolios, but they also have some unique attributes:

  • How many Windows Phones are in their portfolios and what kind of pricing and promotion do they get?
  • What’s up with the big operators and will any of them get behind Windows Phone the way AT&T rode iPhone or Verizon pushed Android?  Verizon has already announced they won’t do Windows Phone at launch.  Partly this is due to the lack of a CDMA-capable phone but you can also imagine if they get iPhone as rumored in the coming months, it is hard to see how Windows Phone doesn’t take a serious backseat while Verizon busily scoops up millions of AT&T customers.  But the flip side of this is AT&T is probably more interested in Windows Phone if they need to fill the hole the loss of the iPhone exclusive will create, though they bring a sullied network reputation to the Windows Phone camp.
  • Beyond the phone itself, there is also a battle being waged for who will control mobile services on the smartphone.  Will the operators accept Microsoft’s various services that are integrated with Windows Phone?  Microsoft is following right through the doors Apple and Google have opened but operators historically have thought of these services as their birthright.  Maybe Microsoft has placated the operators or perhaps they are ready to accept their “dumb pipe” fate (or maybe not).  Google can offer operators more search revenue share than Microsoft, at least based on the underlying economics.

Mobile Application Developers

Windows Mobile historically had a huge developer community and tens of thousands of applications.  But breaking backwards compatibility and the long delays in shipping make developer support for Windows Phone 7 much more tenuous at a time when there are alternatives with huge installed bases to target: 

  • When will the most popular existing mobile apps show up on Windows Phone 7?  Android still hasn’t gotten all my favorite iPhone apps.
  • Will we see breakthrough applications unique to the platform from Microsoft or anyone else?  How compelling are the mobile Office apps?
  • Will we see organic investments by developers or is Microsoft having to pay for apps?  Historically, Microsoft viewed any platform that had to pay developers to write code for it as doomed.
  • Can Microsoft thread the needle and avoid both the totalitarianism of the Apple App Store and the fragmentation and low value add of the Google Market?
  • Will confusion about Microsoft’s commitment to Silverlight after the IE9 HTML5 festivities affect developer investment?  Does Silverlight go forward or has the company quietly dumped it for HTML5?  Or will Microsoft have one programming model for mobile and another for PCs and tablets?
  • Can they get custom enterprise applications, historically a real strength of Windows Mobile and something that plays to Microsoft’s strengths?  This should be a slam dunk although the dynamics of your employer choosing your phone have deteriorated.

End Users

Last but not least are actual customers as the other three will follow if Mikey likes it.  Some key questions:

  • Who is Windows Phone 7 for?  The positioning to date seems all over the place.  The alternating emphasis on Xbox Live, Zune and Office doesn’t exactly scream focus.  All things to all people is a tough sell.  Competing across the board with Android and Apple seems like a mistake for this release.  Far better to be laser focused in this release on Blackberry who just happen to be in freefall anyway plus the enterprise positioning plays to Microsoft’s strengths.  The iPhone hearses in the release parade don’t suggest that kind of focus.
  • Why will a new smartphone buyer want a Windows Phone as opposed to the cool iPhone or a geek-chic Android device?
  • Will new user interface find fans?  Microsoft can’t be accused of just copying the competition as the Windows Phone 7 UI is unlike anything else out there.  I think the live “glanceable” home screen is better than the competition, but the “pan-and-scan” navigation model underneath it feels clunky and disjoint (admittedly I have only played with it briefly).

The smartphone market is a huge and rapidly growing market and there is room for multiple players as the majority of cellphones turn into smartphones.  But to be successful, some of the constituencies above are going to have to get really stoked about Windows Phone 7 for Microsoft to move up from the number five position behind Symbian (ok, that share is up for grabs), Android, iPhone and Blackberry.

And even if Microsoft moves serious volumes, there still are business model questions about a mobile operating system business in a highly fragmented market.  You have to sell a boatload of units at or below $10 a pop to make the billions in development and marketing expenditures pay.  And related services revenue, beyond search, is still more dream than reality at this point.

It will be fun to watch over the next couple months.

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The Hole in Android and Google’s Double Pony Problem

Posted on September 24, 2010 by Charles Fitzgerald

Android is on fire and Gartner predicts it will be the number two mobile operating system worldwide this year, surpassing Apple and RIMM, but behind the seemingly immortal Symbian.  Google embraced the ubiquity strategy and it is working.  But they’re getting a free pass on whether it makes money on the assumption that Android handset volume will eventually drive material search queries, advertising revenue and pull other attached services.  Unfortunately, there is a big hole in that Android business strategy, shaped roughly like this:China

Google’s self-immolation of its China presence means they won’t see much mobile (or any) search revenue in China, the world’s largest mobile market (and home to the largest number of Internet users).  Google’s mobile search share in China dropped by 30% in the second quarter and they’ve already fallen to third place (bonus points: who is second?).  Android stalwart Motorola is using Baidu and Bing on its phones in China plus there are a variety of efforts by Chinese operators and handset vendors that fork Android.  Forking sidesteps the remaining Android constraints altogether and of course provides complete discretion for what services are integrated.  So you can cut Android’s expected revenue per unit by roughly 20% just based on China.

And where China goes, others may follow in decoupling Android from Google search.  In countries with strong domestic search engines like Russia and South Korea, it may be a simple matter of consumer preference.  The more dirigisme (I’ll just note it is a French word) may not be able to resist the opportunity to play with search defaults.  And in the US, Microsoft is persuading Verizon to use Bing for Android phones with what looks like just cash.  There is a real risk of further decoupling of Google search from Android.

Now Google may be content with not monetizing Android due to its other strategic benefits.  Android pressures Apple and Microsoft, significantly disrupts the traditional operating system business model (which we may soon see extended to tablets and netbooks, which will be really interesting to watch) and raises the capabilities bar for the mobile web.  But settling for non-monetary strategic benefits when the guys you’re outselling are making billions is a little embarrassing (admittedly they’re making it from hardware).  I know Google is monetizing Android on the sly around the edges (it turns out Android is not so open and free if you want the latest version and the Skyhook lawsuit suggests some other tying shenanigans) but it is a rounding error from the standpoint of a $25 billion company.

Google is stuck between two Pony problems.  The One Trick Pony problem and their need to find another material revenue stream beyond search looks more pressing as both their search share and their revenue growth flatten out.  Their heyday window to make hay by building additional businesses while on top of the world seems to be coming to a close (life at the top is getting shorter and shorter – we’ll see how long Facebook lasts in that position.  They could peak even before they become a $10 billion revenue company.  Deferring the IPO for as long as possible makes a lot of sense for them to maximize their window).  Android is one of Google’s better candidates for a revenue stream with lots of zeroes after it, but we are already seeing multiple examples where Google’s revenue link to Android is being severed.  This could be described as the My Little Pony problem (a Sun Microsystems reference for those too lazy to click through and parse the obscure video), wherein your free software doesn’t drive significant revenue directly or indirectly, even as others go to the bank on top of your efforts.  As Google’s core business matures, they’ll have less and less ability to make grand philanthropic efforts.  I suspect we’ll see free become less free and Google dare phone manufacturers to shift platforms once they have started down the Android path.

The good news is neither of these problems are mine to solve.

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Do Not Call – What Part of That is Unclear?

Posted on August 2, 2010 by Charles Fitzgerald

imageNothing like having the whole household awoken by a robocall early on a Sunday morning.

The Do No Call law is a huge success.  Over 190 million phone numbers are registered (including mine).  That is truly impressive given it is opt-in.  The law has been expanded a couple times since it was introduced, making registrations perpetual (originally they were for five years) and extending it to cellular and VOIP numbers.  The popularity has spurred other consumer-friendly regulation, in particular an FTC ban on robocalls by telemarkers as of September 2009:

“[A]n amendment making explicit a prohibition in the TSR on telemarketing calls that deliver prerecorded messages without a consumer’s express written agreement to receive such calls. This amendment also requires that all prerecorded telemarketing calls provide specified opt-out mechanisms so that consumers can opt out of future calls.  The amendment is necessary because the reasonable consumer would consider prerecorded telemarketing messages to be coercive or abusive of such consumer’s right to privacy.”

The problem is the original Do Not Call law has a loophole for charities, political organizations and telephone surveyors (arguably just favored subcontractors of the politicians).  They can still call you without restriction.  Charities don’t bother me as they’re generally sensitive about not pissing off potential donors.  The problem is the politicians who have embraced robocalls in a huge way.  My pre-dawn robocall was political.  We were getting several a day in the run-up to the last election.

Given I’ve said I don’t want to be called and our government is already on the record that a “reasonable consumer would consider prerecorded telemarketing messages to be coercive or abusive”, how about we close the loophole and make political organizations subject to both the Do Not Call act and the ban on robocalls?  I am happy to allow political calls by a live person and the lonely or bored are welcome to opt-in for robocalls.

Unsolicited calls from anyone are annoying and all the more so when you’ve already signed up for the Do Not Call registry.  It is reprehensible but not surprising that the political class has exempted themselves from laws they apply to everyone else.  You’d hope in this time of intense focus on creating jobs, politicians will feel the heat for replacing humans with a machine.  Never mind that many of these calls are outsourced to other states (they often have a 202 area code) or perhaps even other countries (gasp!).

I see three options:

  1. Amend the law – we need a politician to show some political courage and get this done at the Federal or state level.  I’m not holding my breath but grandstanders looking for a popular issue could do far worse.
  2. Bypass the politicians – banning robocalls by politicians would make a great referendum at the state level.  All those calls for you to vote against would be the best advertising for the ban.
  3. Retaliate in kind – I could imagine a new service that lets you sic your own robodialer on the people who were nice enough to target you.  Surely the irritation could motivate some small transaction fee.  You could choose from a standard set of (long-winded) messages or record your own.
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A Perfect Match

Posted on July 28, 2010 by Charles Fitzgerald

EU and IBM negotiators discussing the latest EU antitrust charges I have been asked for perspectives on the EU investigating IBM for mainframe malfeasance.  Other than saying how nice it is to see these two fine organizations keeping each other busy, I really don’t have much new to say beyond our last installment on this topic 18 months ago.  The glacial pace is probably fine for the mainframe market.  it is possible that the EU has settled on a strategy to pay for their various fiscal excesses by shaking down American technology companies.  I’m amused that IBM’s defense playbook is to blame Microsoft (and Opera has no doubt filed paperwork in Brussels supporting them).  Unfortunately, IBM’s response doesn’t bolster my hopes they will put their money where their mouth is and open source their mainframe software.  Opening this can of utopian whoopass would no doubt shower the mainframe world with innovation and good feelings.  I guess IBM’s view, despite all the rhetoric, is open source is still for other people’s businesses:

“IBM is fully entitled to enforce its intellectual property rights and protect the investments we have made in our technologies. Competition and intellectual property laws are complementary and designed to promote competition and innovation, and IBM fully supports these policies. But IBM will not allow the fruits of its innovation and investment to be pirated by its competition through baseless allegations.”

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Senator Blowhard – Still At It

Posted on July 16, 2010 by Charles Fitzgerald

image It takes an exceptional act of shamelessness to rise above the general level of shamelessness in Washington DC and merit comment, but noted antennae expert and Senate Finance Committee member Charles Schumer’s decision to weigh in on iPhone 4 reception issues breaks through the noise.  Clearly this takes precedence over less pressing issues like cleaning up the multi-hundred billion dollar and growing double black hole of Fannie Mae and Freddie Mac.  I for one look forward to Senate hearings on the matter.  No doubt a several thousand page “antennae reform and signal stimulus” bill will follow.

Not to endorse Senator Shakedown’s grandstanding, but I do think Apple’s reality distortion field has worn off and everyone knows it except Apple.  Dave Winer nails it.  Companies are always the last to internalize they’re not the plucky little upstart any more and public expectations have changed.

Our runner-up in inanity emanating today is the New York Times’ apparently un-ironic call for the government to manage Google’s search algorithm.  Fortunately, this has been comprehensively addressed by Danny Sullivan.

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Must Have Software: Google Analytics Opt-Out

Posted on July 7, 2010 by Charles Fitzgerald

Google Analytics can track individual Internet users across millions and millions of web sites.  Google has quietly rolled out a browser add-on for Chrome, Firefox, Internet Explorer and Safari that prevents information about an individual web site visit from being sent to Google.  Presumably this was done in response to regulatory scrutiny somewhere in the world as Google does not lightly deprive itself of any information about your Internet activity.

A good start but we still need:

  • The add-on to be distributed through the various browsers’ integrated add-on catalogs and not just buried on the Google site.
  • Google needs to provide the add-on for other browsers as well.  At minimum, they need to support all the browsers they put on stage for marketing purposes (e.g. Opera)
  • Google should build it into Chrome and turn it on by default (note that Chrome still has a bunch of other privacy issues)
  • We need a similar add-on for opting out of AdSense which has a comparable tracking ability.
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Book Review: Cognitive Surplus – Clay Shirky

Posted on July 4, 2010 by Charles Fitzgerald

Cognitive SurplusSubtitled “Creativity and Generosity in a Connected Age”, this is social media theorist Clay Shirky’s second book after Here Comes Everybody, which concerned itself with the dynamics of using social tools to “organize without organizations”.

Cognitive Surplus starts with a potent historical parallel and an astonishing data point.  Early 18th century England had a “Gin Craze” as the population tried to anesthetize themselves against dramatic social changes accompanying the industrial revolution.  Shirky asserts television has played the same role over the last 50 years, absorbing the vast preponderance of free time in the developed world: “The sitcom has been our gin, an infinitely expandable response to the crisis of social transformation”.  He takes a little time to catalog television’s pernicious effects, and makes the point along the way that the asymmetric dynamic between broadcasters and passive audiences of the 20th century media was an anomaly that isn’t going to be reinstated on the Internet any time soon.

The astonishing data point arises from a television producer’s reaction to his relating the story of Wikipedia: “Where do people find the time?”  The impolitic answer of course is Wikipedia’s creators aren’t watching television.  Shirky estimates that Wikipedia is the result of on the order of 100 million hours of work by a vast number of participants.  This seems staggering until he puts it in context: Americans watch 200 billion hours of television every year and “we spend roughly a hundred million hours every weekend just watching commercials.”  That tees up the book: there is a vast collective cognitive surplus available to be harnessed if we can just turn off the television.  What happens when billions of couch potatoes begin to participate, create and share collectively?

The bulk of the book is an exploration of why and how people engage in social production.  In short, he says, it is means, motive and opportunity (just like the common criminal).  He offers a bunch of examples, though open source and Wikipedia remain by far the most powerful and impactful, as well as a variety of psychological research that helps explain personal and public motivations.

There are some suggestions for how to bootstrap and manage services that harvest cognitive surplus, but mostly the book culminates in a desperate plea for “As Much Chaos As We Can Stand” experimentation.  We must keep entrenched interests from squashing new efforts, but also not listen too much to the crazy innovators as they really have no idea what the real impact of their efforts will be.

Here Comes Everybody is a little more actionable for practitioners, while Cognitive Surplus is more of a manifesto (and we love a good manifesto), but well worth the read for insight on the future of media and the new social production model that lies beyond the market or government diktat.

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The Decline and Fall of Mozilla – Continued

Posted on July 1, 2010 by Charles Fitzgerald

IBM Staff MeetingAnother indicator of Mozilla’s continued slide (previous complaints here and here): IBM announces they are standardizing on Firefox.  The party is surely over.  The only news here is why didn’t this happen years ago.

My prescription remains Microzilla.

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Upgraded to WordPress

Posted on June 29, 2010 by Charles Fitzgerald

It is long overdue but this blog is now running on WordPress.  It is an impressive piece of software and hopefully more blogging will result.  A big thanks to those who helped with the migration.

I’ll put just new posts out on Twitter via @platformonomics while @charlesfitz will  continue to be broader and more eclectic/cryptic.

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