Tweetstorm Digest: June 17, 2015

Some @charlesfitz thoughts on Fitbit right before their IPO:

1/ Fitbit IPOs tomorrow and this profitable company has a surprising number of skeptics.

2/ They have dominant market share (85%) and their brand is almost synonymous a la Kleenex/Xerox with the fitness tracker category.

3/ 2014 revenue was $745M with $337M in the first quarter of this year. 2014 profits were $132M.

4/ 2014 performance was despite a recall of its high-end Fitbit Force product due to allergic reactions to nickel metal components.

5/ Even with 50+ competitors introduced at CES, they are holding their own. Nike has exited and Jawbone is in its death throes.

6/ The glib takedown is the company is the next Blackberry –

7/ Apple Watch is touted as a Fitbit killer but it is somewhere between “meh” and an outright flop (heresy I know).

8/ Apple Watch provides a huge price umbrella for Fitbit, whose most expensive product is only $249. Big battery life umbrella too.

9/ Apple Watch is overly complex, inconsistent, slow and, in my view, a Pavlovian notification nightmare.

10/ Apple execs in their chauffeur-driven Bentleys have lost sight of “the rest of us” with Apple Watch.

11/ Apple’s fashion fixation and need for material revenue contribution at Apple scale have perverted the design point.

12/ Fitbit looks good for foreseeable future. Hopefully will be long $FIT tomorrow.

Boxed In

Caged Wild Man by gillfoto, on Flickr
Creative Commons Creative Commons Attribution-Noncommercial-Share Alike 2.0 Generic License   via Flickr

The oft-repeated explanation for Box’s failure to IPO is that they somehow filed at a bad time and “missed the window”.

As usual with Box, the sound bites are better than the substance. They filed on March 24th of this year, a year that has seen the most IPOs since 2000. Since Box’s filing date there have been over 40 technology IPOs (with at least one in every month). These have included various software, SaaS and subscription companies like Hubspot, Yodlee and ZenDesk as well as HortonWorks and New Relic this week. What window exactly is closed?

Meanwhile, the stock market is not far off all-time highs, even as oil plunges, China slows, Russia invades and retrogrades, the Middle East burns, Europe self-immolates, and Ebola spreads, so it isn’t a macro problem.

The “Wall Street just doesn’t get it” argument is that because Box is a subscription business, they should get a free pass for their huge losses, because “lifetime customer value” means it will all turn out fine in the long run (this is of course counter to the Keynesian orthodoxy that in the long run we are all dead).

The people who generously have taken the time to educate us all on this topic (who coincidently often happen to be investors in Box) never seem to want to use Box’s own numbers to illustrate the virtues of a subscription business. Instead, they walk us through companies like Workday and imply that Box is somehow comparable in its subscription economics. They’re not.

There are good subscription businesses and bad subscription businesses. The spreadsheet-wielding denizens of Wall Street, despite their innumerable flaws, understand this quite well. They’ve been running the numbers on Salesforce, Workday and others for years, as well as subscription businesses in other industries.

High customer acquisition costs (traditional top-down enterprise sales model) combined with low revenue per customer (commodity file storage) doesn’t make for a good business. Add seemingly moderate churn and it can get ugly. There are some really crummy subscription businesses out there (TiVo and Vonage come to mind though it has been a while since I looked at their financials).

Add the very real cost of goods sold for petabytes of storage and the overhead of a freemium model (90% of Box customers don’t pay), and it gets even worse (I’ve wallowed in the storage economics and it can be ugly). To own Box stock, you have to believe they will retain their customers for a really long time to pay back the acquisition costs and/or significantly increase their revenue per customer. It is hard to make this case and Box notably doesn’t make much of an effort.

How will Box extract significantly more revenue per customer? They have neither moat nor unique technology (unless you count their “which one of these things isn’t like the others” participation in the Linux Foundation’s Dronecode Project). They don’t have an operations at scale cost advantage. Their “platform ecosystem” is superficial at best. They face giant competitors like Apple, Google and Microsoft with untold billions in the bank who are happily giving cloud-based storage away as a complement to their other services, as well as Dropbox which continues to ooze into the enterprise with a bottoms-up strategy which has dramatically lower customer acquisition costs. Box is still doing the same thing it always has, even as the market has evolved. They no longer have the luxury of just highlighting SharePoint’s inadequacies. Some argue Microsoft’s refusal to support Android and iOS has been the singular Box value proposition – obviously, that is a window that has closed.

The implicit financial bet/hope is Box will find a new and better business soon. But if you read the S-1, you discover Box doesn’t really know who they are or where they are going (though they do claim they’ll be really agile getting there). They’re happy to make a few jokes and compare themselves to all of Apple, Facebook, Zappos and Salesforce with a straight face, yet can’t describe their own raison d’etre (beyond giving good soundbite which I yield to no one in my respect for but tragically that competence is not a foundation for spending hundreds of millions of dollars a year):

We design our software with the passion and attention to detail that you’d expect from leading consumer companies like Apple. Similar to Facebook, we release updates to our product continuously, which allows us to act on user feedback to improve the Box experience and respond to opportunities with agility. We support our customers with the greatest care and attention, delivering Zappos-like support. And we’ve created an open ecosystem much like [sic], leveraging the talents and skills of tens of thousands of developers outside of our corporation to build value on Box.

What would it mean for someone to describe their company as “like Box” in a positive way?

Which brings us to their updated S-1. The good news is Box has reduced their burn, but with it their growth. Box has been a poster child for the recent “excessive burn rate” startup critique. But this is not entirely fair, as Box’s massive spending is not sumptuous employee benefits or other discretionary items, but rather is baked into the business model for customer acquisition.

Then there are the details of the Series F (as in “F#&ked”) financing Box raised this summer when it became clear an IPO was not in the cards while they were still burning mountains of cash. The private equity investors dictated stark terms and will get “theirs” well before any other investor.

Given the Series F investor preferences ratchet up even further if Box doesn’t IPO by July 7, expect an all-out push to get this turkey over the finish line. Amid that push to ring the bell, I hope Box’s fans will explain to us how the company will become a viable and even decent business in the future as opposed to just chanting “LTV FTW” because they really want to get it out of their portfolios. Customers and investors beware.

Amazon: Retailer or Platform Company?

Amazon’s App Store for Android has been denounced as “Rotten To The Core” by Shifty Jelly, a small Australian developer.  It would be safe to say Shifty Jelly’s experience as the “Free App of the Day” didn’t meet their expectations.  The headline complaint was that developers don’t actually get paid by Amazon when they’re the “Free App of the Day”, contrary to industry belief.  This resulted in at least one lede of “Apparently Apple isn’t the only company running an App Store with a penchant for secrecy” and generally conflating Apple and Amazon’s App Stores.

This is a misleading comparison.  Amazon’s philosophy towards developers is fundamentally different from Apple’s.  The Apple App Store is far more developer-friendly today. Shifty (it may be presumptuous but I’m going to leap to a first name basis here) also mentions in passing that Amazon retains the right to set pricing and write the product description, amongst other terms, for any app in their store.  This is far more important than how they compensate for promotional sales.  And Shifty is not the first developer to question Amazon’s approach.

Amazon is fundamentally a retailer. Their lizard brain comes from the same evolutionary tree as Walmart (and there was a fair amount of genetic transfer from Arkansas to Amazon in their early days).  Great retailers squeeze every last drop of blood out of their suppliers (here is a briny illustration of Walmart in action on this front).  The problem is that without a very conscious and explicit effort, Amazon will default to treating app developers as suppliers, triggering all sorts of behavior that it going to make it very hard to cultivate developer loyalty.  They almost can’t help but behave this way; it is the expression of their corporate DNA (and that is something I appreciate when I am an Amazon customer).  Retailers see applications as just another product that sits on their shelf.  And they unilaterally print the price tags for anything on their shelves and completely control the contents of any marketing materials they create. It is inconceivable to a retailer that someone else would be setting prices or deciding what goes in their weekly advertising circular.

This isn’t just one-off behavior for Amazon; they run the Kindle app store the same way.  It isn’t well known, but there is an SDK for Kindle (the device) and you can build apps for it (you can see various Kindle apps here).  I’ve now heard from developers about submission experiences for multiple Kindle apps and the approval process makes Apple look open, transparent and speedy by comparison.  Developers get heavy-handed guidance on what their price should be and once in the store, have no ability to change price, even to run a temporary sale.  Product descriptions are rewritten by people guaranteed to know less about the application and its customers than the developer.  Some of this is a function of a team that is running flat out (Amazon runs lean and has not staffed up for reviewing lots of apps, much less learning enough about apps to write accurate and persuasive sales copy for each app), but it also is a reflection of the basic fact they are a retailer.

Contrast this to Apple who are fundamentally a platform company (despite all those stores…).  Yes, they have a bunch of rules for what gets into the App Store, occasionally make a bad judgment call, stumble on political landmines or put their thumb on the scale to advantage their own products, but by and large they do pretty well by developers.  Once you’re into the Apple App Store, you control and can change your pricing and you get to explain to potential customers what your app does.

This cultural dichotomy between seeing developers as just another set of suppliers to be plucked versus partners to be cultivated is the biggest challenge for Amazon as they roll out what otherwise looks like a promising tablet strategy this fall.  Hopefully they will suppress the WalMart gene, recognize developers have a choice of platforms and at least meet if not exceed the Apple bar in order to build a vibrant application ecosystem.  Amazon has hired a lot of Microsoft people with platform experience who understand the care and feeding of developers.  They need to step up if Amazon is going build winning platforms.


As WARM (Windows-ARM) reportedly takes the stage in Las Vegas tomorrow, some thoughts:

  • This is “big” Windows, not yet another repackaging of Windows CE.  Remember Windows NT got its start supporting multiple CPU architectures.
  • This has huge implications for Windows Phone’s future.  It makes no sense to have two separate operating systems and application ecosystems for increasingly overlapping touch devices (phones and tablets).  It sucks for customers, developers, OEMs and is terrible for Microsoft economically to have to build and support parallel operating systems.  And Windows Phone’s road is profitability is hard to imagine.  Even if you assumed a wild leap to 20% market share, at <=$10/unit, it isn’t going to pay for the 3,000+ people working on it, never mind the marketing spend and OEM “incentives”, any time soon.  Windows Phone 8 probably is a configuration of big Windows on ARM which lets that team focus on the phone experience and not have to build an operating system top to bottom.
  • This also explains the demise of Courier – a third operating system in the mix would be exponentially worse.  Presumably the Courier application experience is being implemented on big Windows as the shell for Windows tablets.
  • While iOS is Apple’s branded operating system for touch devices, it shares the same underlying kernel, tool chains, etc. with Mac OSX.  Microsoft aspires to have a single, modular operating system that can be factored appropriately for the increasing variety of form factors.  Better modularization will also help power efficiency from a software perspective.  Expect new configurations of big Windows for TVs, settop boxes, etc.
  • In theory Windows apps can be recompiled for ARM, but in reality they all need new user interfaces for the touch world.  So much for the vaunted “applications barrier to entry”.
  • Meanwhile, the modest traction Microsoft is making with application developers for Windows Phone 7 is at risk as it is not clear whether the Windows Phone application model will be supported in the future or whether something new will be introduced.  History suggests the big Windows team will have opinions on the application model.
  • The ARM support won’t show up until Windows 8 (presumed to be 2012), which is an awfully long time to wait.  The incredibly late to materialize Windows 7-based tablets look like sacrificial offerings.  Meanwhile, analysts variously estimate Apple ships between 30 and 50 million iPads this year.  And we’ll see how whether Android 3.0 is as successful with tablets as it was with smartphones, with devices hitting the shelves shortly.  There is a huge difference between being number two and number three in  market (and I guess I should mention RIMM and WebOS for completeness and the possibility Microsoft could be number five in this market).  Microsoft might consider stopping spotting multiple competitors multi-year leads in some of these markets.  But maybe the company just likes a good challenge.
  • Needless to say, Microsoft is in a tough position.  Getting to a single operating system and single application model is desirable for the long term, but the degree of difficulty to get there is incredibly high being a year or more from shipping product, having a full slate (yuck, yuck) of competitors in the market and potentially Osborning the current Windows Phone along the way.
  • But it could be worse – you could be Intel.  Microsoft porting to ARM is a serious indictment of Intel’s power efficiency roadmap.  Historically, Intel-Microsoft executive meetings have had colorful moments and I’d pay to see video of some of the recent ones.  I do expect Microsoft to take the high road and throw Intel a conciliatory bone or two, deeming the next generation of Atom chips to be “pretty good (for you guys…)”.  And while client-focused, this move also improves Microsoft’s options for supporting ARM-based servers in the future, making this a double-barreled nightmare for Intel.  But at least they control their own destiny with that MeToo, er, MeeGo operating system.

Will be fun watching to see how Redmond plays this one.

So Who is Giddy About Windows Phone 7?

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.

Senator Blowhard – Still At It

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.

Putting Your Head in a Vise

As Apple gets ready to ship iPads with 3G wireless, it is interesting to go back and see what we can piece together about the most recent negotiations between Apple and AT&T.  It looks like they concluded their latest deal right before the January iPad announce as Verizon rumors were still rampant right up to the event (I now believe any unsourced Apple rumor in the New York Times or the Wall Street Journal comes directly from Apple).

I wrote a little about this when the iPad was announced:

The Dumb Pipe

Even though it was greeted with derision, Apple’s deal with AT&T for 3G data service is significant.  No doubt part of a broader negotiation between the two companies, the iPad data plans set a bar for other operators to meet or beat on price, quota and lack of contractual commitment.  AT&T, along with other operators around the world, end up more removed from the customer and one step closer to being not just a dumb pipe, but an invisible dumb pipe.  It will be interesting to see the terms and conditions and to what degree AT&T gets brand awareness.

I now surmise that AT&T got:

  • To keep iPhone exclusivity in the US for some unknown period of time.  AT&T really doesn’t have a choice here as iPhone is a huge driver for their wireless business and they risk losing millions of customers the day iPhone is available from other US operators.  So they want to string out exclusivity and do what they can to enhance their network in the meantime.  The Wall Street guys continue to speculate on what it would mean for AT&T and Verizon if AT&T lost exclusivity.
  • The opportunity to spend billions to bolster their network with Apple generously applauding AT&T’s big investments.  AT&T offset this expenditure on their balance sheet with a sly hint that Apple shares some of the blame for the iPhone’s bad network experience.
  • The “right” to offer iPad users free use of AT&T’s Wi-Fi to mitigate the hit on their network.  AT&T continues to state that they believe iPad is mostly a home/Wifi device, but I have seen a bunch of them on airplanes (but then there are people who live on planes…).

Meanwhile, Apple got (in addition to the last two points above):

  • No changes to iPhone “all you can eat” data plans (AT&T would love to charge for usage – I have heard iPhones are driving over 65% of all wireless data traffic in the US)
  • Sweet pricing and terms for iPad 3G service that sets a great precedent for other operators in the US and beyond (could their resistance to these terms be contributing to the slip in international availability?), including
    • A choice of a low price plan ($14.99) and an unlimited plan ($29.99) that really is unlimited (“unlimited” usually means limited in the Orwellian doublespeak used to describe most mobile data plans).  UPDATE: the bandwidth may be unlimited, but it seems there is traffic shaping of streams going on.  AT&T is implying Apple is to blame.  Some of this may just require app updates and/or the v4.0 OS.
    • No contract  – you can cancel at any time
    • On-the-fly provisioning from the device
    • No AT&T branding in the experience?  Could it become non-exclusive at some point and let you choose from multiple operators in the future?  UPDATE: Looks like there is a token AT&T logo on a the billing page.
    • No word on whether AT&T is sharing service revenue back with Apple.  My guess is not.
  • Coincidently, the VOIP over 3G restrictions in the App Store disappeared about the same time.  Given you still have to buy a voice plan with an iPhone, this doesn’t help much (yet), but it presumably also applies to the iPad.

Guy Kawasaki once likened competing with Microsoft to putting your head in a vise.  That may be a more apt description of competing with his alma mater Apple today.  And based on the AT&T negotiations, it may be even worse to be an Apple partner. 

Apple and to a lesser extent Google really are doing a phenomenal job changing the dynamics of the telecom industry – for the better.  For all the (valid) complaints about Apple’s heavy-handed control, it is still an improvement over the operator-controlled world of yore.  The only downside of all this is operators around the world are pissed off as their dumb pipe nightmare comes to pass and in the absence of being able to get the better of Apple, they’re taking it out on other companies.