NQ Logic

Top 10 Days in 2011 for Technology

2011-12-16T08:00:00.000+08:00

The year-end holiday season always seems like an appropriate time to reflect on what happened during the past year. While the Middle Easterners are taking their political future into their own hands, Europeans seems to have given up their economic future. The US is gearing up for its election year and the rest of the world continues to fight what the economic analysts have named the stagnation years.

In the technology world, 2011 was an unusual year with surprising consolidations, unexpected cross-market acquisitions and new multi-dollar IPOs. Here are the top 10 game-changing days for 2011 in the technology world, in order of their appearances.

February 11, 2011: Nokia partnered with Microsoft
Following Nokia CEO Stephen Elop’s "Burning Platform" memo, Nokia and Microsoft announced a new global strategic partnership. Under the proposed deal, Nokia will adopt the Windows Mobile as its principle smartphone OS, phase out its own Symbian and abandon MeeGo even before its launch. Rightly or wrongly in this reversal of strategy, Nokia’s attempt to become the third ecosystem behind Apple and Android, is now hitched to Microsoft's less-than-stellar efforts in mobile. Let' see how Nokia's first Lumia phones with Windows Mobile will do at their year-end launch in India, whether they will reverse the sharp decline in Nokia's smartphone business (-38% units shipped in Q3).

March 20, 2011: AT&T (tries to) acquire T-Mobile USA
With T-Mobile, AT&T was not just buying a rival but buying 5 years' worth of infrastructure development and a customer-friendly company in the market. In a single move AT&T managed to snag the only sizable competitor that could be integrated rapidly and have a high return on investment immediately on the acquisition completion date. Recently, the two companies took back their original merger application after the FCC chairman came out against the US$39 billion deal. Instead the two companies will seek approval from a federal judge, and will file another FCC application in early 2012. In the end, the long regulatory battle might see the last big telecommunications consolidation in the US, and the colossal breakup fee (US$3 billion) might be remembered as an minor footnote in the world of M&A.

May 10, 2011: Microsoft acquired Skype
With this US$8.5 billion cash deal, Microsoft consolidated its leadership position in the Unified Communications space in the enterprise market, and peer-to-peer communication in the consumer market. The Redmond-based company is finally putting to use US$42 billion out of the US$50 billion of its overseas cash reserve, avoiding the 30% repatriation tax rate. This expensive acquisition (the largest in Microsoft’s 36-year history) may seem costly today, but if the company manages to create a new, seamless communication experience across multiple screens (TV, Mobile, and PC today; plus Tablet tomorrow), this deal could be seen in retrospect as the best move Microsoft could have made in the lucrative global telecommunications industry with its trillion US dollar revenue per year. One hurdle is for Microsoft to assuage all its carriers and telecommunications partners around the world, that Skype is not a major competitor.

May 19, 2011: LinkedIn went public
From its initial public offering on the New York Stock Exchange (symbol: LNKD), LinkedIn raised US$352.8 million, offering 7.84 million shares (8.3%) of its total 94.5 million shares. After 3 years of low activity in the IPO market, LinkedIn kick-started of a new era of the social media IPO tsunami. Looking at the buzz surrounding the most stable and less risky of all “Big Five” IPO contenders (LinkedIn, Facebook, Twitter, Groupon and Zynga), investors are eager to jump on the next band wagon. Today investors prefer remembering Google and Apple stock prices rather than the Dot Com bust to make their decisions. Tech IPOs are back.

August 15, 2011: Google acquired Motorola Mobility Holdings
Google's ambition of reaching the most mobile devices on the planet has been reached and this day Google achieved what it wanted when it initially ventured into the mobile space four years ago with Android OS: to establish its name, credibility and loyalty with consumers. It is now time to convert this massive market share into a more steady revenue. Android generated US$5.90 per user in mobile advertising in 2010. But the figures are still pale compared to selling high-end phone devices (e.g., Apple makes US$370 profit for every iPhone sold). The Mountain View company has yet to find the next billion dollar revenue stream, as 97% of Google’s revenue is from advertising. With the Motorola Mobility acquisition, Google just entered a new billion-dollar business with a strong brand name. The mobile handset manufacturing business could be an interesting add-on to the core advertising business, if tighter development and integration could be done between software and hardware, somewhat like Apple. Whatever Google chooses to do with the US$12.5 billion Motorola Mobility acquisition, now it is the only mobile company that might be able to compete globally with Apple head-to-head... at least until the Windows-Nokia reboot, if all goes well.

September 6, 2011: Yahoo! fired its CEO
Yahoo! Chairman Roy Bostock fired CEO Carol Bartz. Bartz's reign lasted 32 months. CFO Tim Morse has stepped in as the interim CEO, while the company is still in search for a permanent leader (some people have already denied wanting filling the CEO position). Yahoo is currently evaluating a bid led by Silver Lake Partners and a rival proposal from TPG Capital for minority stake position in Yahoo! capital. Chinese e-commerce giant Alibaba (in which Yahoo! has 40% stake) and Japan’s Softbank Corp. (in which Yahoo! has 35% stake), are also interested in a deal with Yahoo! So 2012 might just be the year when Yahoo! gets sliced up.

September 22, 2011: HP also fired its CEO
HP Chairman Ray Lane announced that the board of directors has appointed Meg Whitman as HP President and CEO. Léo Apotheker stepped down as president, CEO and Director of HP. Apotheker's reign lasted less than 10 months. HP tried multiple times to rejuvenate its splendor in naming CEO's with impressive résumés and proven competence, but have ultimately failed to raise its low share price, exposing itself to hostile take-overs. Such is a large corporation's life (and its CEOs too) in modern capitalism, to live and die by quarterly numbers.

October 6, 2011: Steve Jobs passed away
Only a few days after stepping down from his CEO position at Apple, the company he co-created over 40 years ago, Steve Jobs died. More than a CEO, a founder or an innovator, he was seen as the ultimate visionary that could make dreams come true and set the standard for beautiful, functional, user-centered devices. The industry lost a unique icon known for relentless pursuit of perfection and pushed the boundaries of an entire industry. If there was only one day to remember in 2011 in the technology world, it would be this day that Steve Jobs left us.

November 4, 2011: Groupon went public
Groupon Inc. raised US$700 million in exchange of 30 million shares (or 5% of the company's common stock), which was the largest IPO by a US Internet company since Google raised US$1.7 billion in 2004. Groupon Inc., which has over 100 million subscribers in 45 countries, sells Internet deal-of-the-day coupons for everything from spa treatments to restaurant discounts. Prior to its IPO, the “world's fastest growing company” was put under severe scrutiny from the Securities and Exchange Commission for its accounting practices. Some analysts also claimed that the company that once turned down a US$6 billion offers from Google, operates like a Ponzi scheme. According to its IPO documentation, the Chicago-based company has publicly disclosed that while it was losing approximately US$100 million per quarter, the company decided to use its later investors' money to pay off earlier investors and founders (US$940 million from the US$1.12 billion VC money). Despite all the pre-IPO negative press and mismanagement, Groupon managed to stabilize its share price to its original US$20 public offering, just in time for the holiday season.

December 9, 2011: HP’s webOS goes Open Source
After deciding to finally keep its PC business in house, HP announced that it will give away the webOS (OS created by Palm, and bought by HP for US$1.2 billion earlier last year) to the open source community. This surprising news is in fact a perfect move in the current OS war. Since Android, now tied to a handset manufacturer (Motorola), faces increasing complaints from manufacturers and possible patent attacks from competitors, webOS appears to be the next clean open source OS contender. With this move, HP is positioning itself as the front lead for the next multi-screen-one-OS strategy, leading the path to other manufacturers for mobile, tablet, printers and maybe… PC. And all of that with no resource commitment.

Source: NQLogic.com (Dec 2011)

In this year of economic crisis and political instability, the few winners in the technology space have been a small handful of internet start-ups who managed their way up and out well with impressive IPOs (with more to come next year). Similar to 2009 and 2010, the few large multinational companies with their deep cash reserves, expanded into new businesses while leaving behind their competitors. And it is tough at the top of these global corporations, where CEOs can be fired by Wall Street. NQ Logic is looking forward to seeing you in 2012.

Happy holidays to everyone.

Long Boards, Short CEO's

2011-10-07T10:09:00.001+08:00

Rarely has the causality principle (“the same cause produces the same effect”) been more true in the technology world than in the past few weeks. Two very different multinational companies fired their CEO's for the same reason: under-performing stock price.

Yahoo! Chairman Roy Bostock fired CEO Carol Bartz on September 6, 2011. CFO Tim Morse has stepped in as the interim CEO, while the company is still in search for a permanent leader. Bartz's reign lasted 32 months.

“On behalf of the entire Board, I want to thank Carol for her service to Yahoo! during a critical time of transition in the Company's history, and against a very challenging macro-economic backdrop. I would also like to express the Board's appreciation to Tim and thank him for accepting this important role. We have great confidence in his abilities and in those of the other executives who have been named to the Executive Leadership Council.” – Roy Bostock, Chairman of the Yahoo! Inc. board of directors [Sept 06, 2011]

On September 22, 2011 Chairman Ray Lane announced that HP board of directors has appointed Meg Whitman as president and CEO. Léo Apotheker stepped down as president, CEO and director of HP. Apotheker's reign lasted less than 10 months.

“We very much appreciate Léo’s efforts and his service to HP since his appointment last year. The board believes that the job of the HP CEO now requires additional attributes to successfully execute on the company’s strategy. Meg Whitman has the right operational and communication skills and leadership abilities to deliver improved execution and financial performance.” – Ray Lane, Executive chairman of HP board of directors [Sept 22, 2011]

The troubled realities and problems are in fact much deeper and have long rooted explanations than what is mentioned in these companies' official statements. A closer look at the past few years’ of company histories should be done to understand their situations.

The Yahoo! Way

Yahoo! Inc. is an American internet corporation. Founded in California by Jerry Yang and David Filo in January 1994, the company was incorporated on March 1, 1995. The web site started out as a hierarchical directory of other websites, and was named "Jerry and David's Guide to the World Wide Web" but eventually was renamed Yahoo!, acronym for "Yet Another Hierarchical Officious Oracle”.

Source: Yahoo! original logo [Oct 20, 1996]

The iconic company is best known for being a leading web content provider, and one of the few survivors of the dot-com era alongside eBay, AOL and Amazon, but throughout its history it has always had trouble in stabilizing its revenue stream and finding great CEO's.

Terry Semel, who spent 24 years helping to build Warner Bros. into a U$11 billion company, was appointed as Yahoo! CEO on April 17, 2001. Replacing the first CEO Timothy Koogle (“TK”), his mission was to restore past growth and profitability in the middle of the dot-com bust. During his watch, Yahoo! expanded at a dramatic pace through large and costly acquisitions such as Overture for U$1.63 billion (2003), Kelkoo for €450 million (2004), HotJobs.com for U$436 million (2001), or Musicmatch for U$160 million (2004). Semel was instrumental in the Alibaba.com partnership (40% for U$1 billion stake), but was unsuccessful in buying Google, even for U$5 billion.

Despite turning Yahoo! into a global media company, Semel failed to acquire the best industry talents or integrate all the different acquisitions into one single company. In an attempt to regain investor confidence, Semel ended his six-year tenure as Yahoo! CEO on June 18, 2007 and handed over the reins to co-founder Jerry Yang. During his 5 years as a CEO at the Californian company, Semel managed to gain U$430 million in total compensation.

With Jerry Yang back at the top, morale and acquisitions were both on the rise. But the declining share price had triggered potential hostile takeover bids. On February 1, 2008 Microsoft and its solid balance sheet proposed to acquire Yahoo! for U$31 a share representing a total equity value of approximately U$44.6 billion (a 62% price premium). Yahoo! board declined the proposal but ultimately ended up giving its search business to Microsoft. After the Microsoft deal battle, Jerry Yang decided to step down as CEO.Under his watch the company has lost tens of billions of dollars in market capitalization, thousands of former Yahoo! employees, and lost credibility in the industry after the Microsoft deal fiasco.

Carol Bartz replaced co-founder Jerry Yang as CEO [January 13, 2009]. The former executive chairman of Autodesk had a single mission: to fix Yahoo!'s profitability and bring in a strategic focus to the media company. After multiple layoffs (3000 employees in April 2009, 600 in December 2010), cost cutting, missed financial targets and pale comparison with rival Google, outspoken Bartz was fired on September 6, 2011.

With 680 million users worldwide, U$6,324 million in revenue in 2010 and 13,600 employees worldwide Yahoo! is today a leading online global brand tailored to marketers and advertisers. But in a deflationary digital economy coupled with a global economic recession, Yahoo! has a harder time defending (and even less, expanding) its virtual online presence.

Source: Yahoo! Share Price [Sept 07, 2011]

Undoubtedly, without its two large investments in Yahoo! Japan (35%) and Chinese Alibaba (43%), the Californian company’s valuation would be much less than the currently estimated U$23 billion. Many have been rumored to be interested in buying Yahoo!, among them Microsoft, Alibaba.com, and major Silicon Valley VC's.

The HP Way

HP is a different story altogether. The company is a more mature American technology icon than Yahoo!. Founded by Bill Hewlett and Dave Packard in 1935, today HP ships more than 1 million printers per week, 48 million PC units annually, and one out of every three servers worldwide. Similarly to Microsoft, HP is a leader in both the consumer and the business segments, a rare feat.

HP is one of the world's leading ICT companies in terms of net revenue, U$126 billion in FY10, up 10% from the previous year. The non-GAAP operating profit for the same FY10 was U$14.4 billion. With over 324,000 employees worldwide as of October 31, 2010, and over 1 billion customers around the planet, HP was the first ICT company that crossed and stayed above the symbolic U$100 billion in yearly revenue since 2007.

On July 19, 1999, HP named Carleton "Carly" S. Fiorina as president and CEO. The former Lucent Technologies executive and most powerful woman in American business, according to Fortune magazine at the time, was a unique phenomenon in the US corporate world. She led the biggest IPO in US history at the time and ran the largest telecom equipment company in the world turning in U$19 billion in annual revenue.

As her first significant strategic move, HP announced its merger with Compaq on September 4, 2001 for U$25 billion in stocks after a very lengthy and costly fight. This move was considered at the time to be the biggest merger ever in the ICT industry and a most risky acquisition. Unfortunately, the legendary HP was beginning to struggle in the competitive hardware PC business. Squeezed by IBM on the high end and Dell on the low end, HP (now with Compaq) could not satisfy their investors with their low profits. Ultimately, Fiorina, the mastermind behind the Compaq acquisition, was fired by an impatient HP board. Fiorina walked away with a U$21 million check on February 10, 2005.

On April 1, 2005, Mark Hurd was named CEO of HP. The former executive of NCR, a spin-off of AT&T that makes automated teller machines, had one clear mission: fix HP profitability. He was previously named CEO of NCR in March 2003 and engineered a substantial turnaround in the company's fortunes, while making large acquisitions. His past experience was going to serve him well in his HP adventure.

Under his watch, HP went on a frenzied acquisition mode: Mercury Interactive for U$4.5 billion (2006), EDS for U$13.9 billion (2008), 3Com for U$2.7 billion (2009), Palm for U$1.2 billion (April 2010), 3PAR for U$2.35 billion (September 2010), ArcSight for U$1.5 billion (September 2010) were among the most important multi-billion dollar HP acquisitions. But with aggressive cost-cutting, Hurd improved profitability, and grew revenue at the same time. He laid off 15,200 workers shortly after becoming CEO, reduced the IT department from 19,000 to 8,000, and consolidated the 85 worldwide data centers into 6.

HP became the number one technology company ahead of IBM, despite spying scandal from board members and other executives. HP's stock price doubled under his leadership (from U$21 to just below U$42) despite reports of low employee morale, long term debt exposure and below average net profit margin. Shockingly on August 6, 2010, CEO Mark Hurd resigned under pressure by the board over a sexual harassment investigation. He later joined rival Oracle as Co-President.

On September 30, 2010, Léo Apotheker (ex-SAP Co-CEO) became HP's new CEO and Ray Lane (ex-Oracle President and COO) was elected to the position of non-executive Chairman at HP. Apparently exhausted from all the infighting, most board members did not meet with Apotheker during the interview process. In September 2010, Léo Apotheker took the helm and, understandably reshaped the Board, bringing seven new directors, notably Ray Lane and Meg Whitman (ex-eBay CEO). A new strategy was decided and put in place by Apotheker, but the 40% drop in share price within his first 10 months of being the CEO, drastic decisions and the costly £7.1 billion Autonomy acquisition did not leave any room to turn around the troubled company. On September 22, 2011, he was fired by Ray Lane and replaced by Meg Whitman, two people he brought with him during the early board reorganization of 2010.

Meg Whitman will work for U$1 a year, and could have a target bonus as much as U$2.4 million for fiscal year 2012, depending on share price value.

Whitman decided to keep the strategy and execution begun by Léo Apotheker earlier. Since the announcement, HP's stock price gained one dollar (+4.7%).

Afraid of a possible hostile take-over (especially from rival Oracle), HP has recently hired Goldman Sachs to defend itself from activist investors.

Source: HP Financial Results [August 2011]

Conclusions

Although Yahoo! and HP are very different, they are sharing the same pain in current embattled times: a declining and dangerously low share price exposes them for hostile take overs. Both boards tried multiple times to rejuvenate their splendor in naming CEO's with competence and impressive résumés, but have ultimately failed.

A few conclusions can be drawn from these two similar stories, and can be extrapolated to other troubled technology companies:

Boards are more transparent.
In the past, it was quite rare that board room discussions were leaked to the mass media. Today the internet, the media outlets and attitudes regarding board authority have rebalanced the information asymmetry. More and more often, troubled technology company board discussions surface to the public knowledge as a new 'transparency' tactic to influence the inside vote or outside opinion. Unfortunately this tactic only brings confusion to the public, accelerates the downward spiral, and boards are becoming more nervous about their decisions and their consequences.
Boards have less time.
Business cycles in the technology industry have accelerated over the recent decades and companies that used to think in years, have to think in months (if not days). This acceleration has drastic consequences, leading to today's common crisis in board rooms. Boards, and even more so CEOs, are now on a quarterly probation. Moreover, in this unstable economic period of speculative uncertainty, where investors with large clout and capital are trying to find a safe haven at any cost, stock prices are extremely volatile, immediately reflecting (and reinforcing) the level of faith in technology company's announcements. So rather than having a longer perspective for the company's role in the technology marketplace, investing in R&D, making bold bets, most troubled technology companies are using "leading from behind" strategy as an excuse in their lack of guts, anticipation and judgment.
Boards pay too much attention to stock prices.
In choosing to focus too much on stock price and short-term results, rather than financial stability and delayed pay-offs for long-term investments, boards have turned away from their main responsibilities. Troubled technology companies are now confusing the incremental measurement of their efforts with their ultimate strategy (See Meg Whitman's compensation structure, which is solely based on share price performance). Making acquisitions with some 'synergies', loosely connected to a vision, have become a quick way to make over their financials and market perceptions for the next few quarters.
Boards do not anticipate end-of-growth stage.
Regularly technology companies hit a wall of growth and cannot expand beyond their current stage for various reasons: geography, customer segment, end of product life, disruptive technology, regulations, etc. Then it is time to divest part of the companies' business, and consequently dilute their market cap and stock price. Very few boards have the fortitude to formulate, execute and support such a strategy (e.g., IBM selling their PC business to Lenovo in 2004). Troubled technology companies typically hold on to their end of life product/service and end up becoming a "too big to fail" company with a mixed portfolio and message. This ability to foresee market reactions both at the beginning and the end of a product/service life is indeed a rare and a unique capability of the boards (e.g., Apple, Google, IBM).
Boards do not always make a good CEO succession plan.
Troubled technology companies always choose an outsider as their new company CEO in the hopes that an external leader could lead them to fresher insights and a faster recovery. Unfortunately, a steep learning ramp-up period, mistrust of the senior leading team and disengagement toward current strategy have been the more standard results of the initial shock therapy (quite the opposite of the insider CEO approach).

It is unfortunate that market leaders such as Yahoo! and HP are in such a despair but their boards certainly own a large part of that responsibility. It should not come to anyone's surprise that after having created much value for shareholders, companies can also destroy value for them. Such is a company's life in modern capitalism.

“A good Board can't make a company, but a bad one will inevitably kill it.” — Barry M. Weinman, Managing Director and Co-Founding Partner Emeritus, Allegis Capital [Sept 26, 2011]

Steve Jobs

2011-10-06T08:59:00.002+08:00

Steve Jobs Launches “iQuit”

2011-09-02T11:09:00.023+08:00

What was feared yet expected for some times now, happened last Wednesday on August 24, 2011. Fourteen years after becoming the interim CEO [1997], Steven P. Jobs resigned from his CEO role at Apple Inc., the company he co-founded with Steve Wozniak back in 1976.

“I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come. I hereby resign as CEO of Apple.” – Steve Jobs, ex-CEO of Apple [Aug 24, 2011]

Almost immediately, Apple’s Board of Directors announced that Tim Cook, previously Apple’s Chief Operating Officer, would be the company’s new CEO, and that he will join the Board immediately.

In his first email to Apple’s employee as the newly appointed CEO, Tim Cook stated that he was excited to pursue Steve Jobs' vision in bringing innovation to market, and will keep the magical component of the company intact.

“I want you to be confident that Apple is not going to change. I cherish and celebrate Apple's unique principles and values. Steve built a company and culture that is unlike any other in the world and we are going to stay true to that—it is in our DNA. We are going to continue to make the best products in the world that delight our customers and make our employees incredibly proud of what they do.” – Tim Cook, new Apple CEO [Aug 25, 2011]

Steve Jobs will continue on as the Chairman of Apple's Board.

Industry Reactions

Though long anticipated, the news still sent a shockwave to the entire media world. Twitter, the blogosphere and the online media outlets relayed the information for non-stop over several days.

2.5% of Twitter's worldwide traffic was about ‘Steve Jobs’
on August 25 according to Trendistic.com [Aug 25, 2011]

Praises, anecdotes, remembrances, company history and Thank you notes circulated on the digital planet at the speed of light. The formidable echo chamber around the world that followed the announcement was closer to an interplanetary rock star obituary than another American CEO entering pseudo-retirement. Once again Apple PR machine managed to acquire the attention of the whole world for few days.

The announcement should not come as a complete surprise. In January 2011, Steve Jobs took another medical leave of absence from the company, and while he remained as CEO, Tim Cook took on the day-to-day operations for Apple. Apparently Apple Board members have been discussing the potential next CEO for years, and have been talking secretly about a succession plan for many months independently.

It was time to pass the reign to the best possible successor: an insider, official number two in the Apple’s hierarchy and long time COO, Tim Cook.

Who is Tim Cook?

Tim Cook has been Apple’s acting Chief Executive since Steve Jobs went on medical leave early this January 2011. Often described as a “Southern Gentleman”, he is best depicted as a “tireless worker, a brilliant corporate strategist, and a fitness nut.” His analytical mind has been praised by many observers and his management style has been portrayed as less emotional than the one of Steve Jobs. The industry view of Tim Cook is as an intelligent and good leader and that under Tim Cook, Apple is in capable hands.

He joined Apple in 1998. During his early tenure as supply chain guru, he closed many of Apple’s production factories in California and outsourced manufacturing to suppliers in Asia. He later became COO in 2007. As COO, Tim Cook was responsible for all of the company’s worldwide sales and operations, including end-to-end management of Apple’s supply chain, sales activities, and service and support in all countries.

Before joining Apple, Tim Cook was VP of Corporate Materials for Compaq and was responsible for procuring and managing all Compaq product inventory. Previous to that, he was COO at the Reseller Division at Intelligent Electronics. He also spent 12 years with IBM, most recently as director of North American Fulfillment where he led manufacturing and distribution functions for IBM’s Personal Computer Company in North and Latin America.

As part of his nomination, Tim Cook was granted by Apple’s Board, 1 million restricted stock units, half vesting in August 2016, and half vesting five years later, in August 2021. At today’s valuation, the cash value of Cook's compensation would be above U$380 million. As COO, Tim Cook received in 2010 U$58 million in salary, bonus and other stock awards.

What Will Change?

Nothing.

It was quite clear for some time that COO Tim Cook was the guy in charge at Apple. During the medical leaves that Steve Jobs took in recent years, Tim Cook successfully stepped in, showing to the Board, the company and investors that he would be the natural candidate when Jobs' replacement was duly needed.

Apple’s stock price, one week since the announcement [Aug 31, 2011]

Investors have digested the message and the Apple Inc. stock was up by over 8% (see above graphic), a week after the announcement. Pros and Cons of the news are still being debated by the investment community, and no firm judgment has emerged since the departure of Steve Jobs, which is still good news for the Cupertino-based company.

In the long run, depending on the extent of Steve Jobs' involvement as Chairman, Apple might encounter some difficulties to maintain its phenomenal trajectory. Succession war (who will replace Tim Cook for COO, or the ‘visionary Steve’?), media coverage (who will replace the ‘icon Steve’?), patent wars (Steve Jobs is the key inventor for 313 of Apple's patents), and potential disengagement from Apple’s cult-like fan base could all be reasonable threats to the most innovative corporation in the world.

Apple's Incredible Run Under Steve Jobs,
by Business Insider [Aug 25, 2011]

What we know for sure is that Apple will have a brand new headquarters, the authorized and recently updated biography ‘Steve Jobs’ will be out this November, and the next iPhone is scheduled for release just in time for the holiday season.

For the rest, the future will tell.

What Can We Learn From Apple?

Rather than looking forward, for once it could be interesting to investigate Steve Jobs’ legacy. Apple is a singular company in the business world. It would be too easy to summarize Apple's success story with few delightful facts, some sparkly quotes or through its founder's life story, but in reality Apple was built over 35 years as a phenomenal technology company. The technology world as a whole would have been very different without Steve Jobs as a CEO at Apple.

Few important lessons from the Apple success story can be drawn here.

Second Chances. It is very rare, but a technology company can have a second chance. Steve Jobs who founded the company in 1976, retook the CEO position in 1996 after being fired in 1985. At the time Apple was on the brink of bankruptcy. After a difficult turn around Apple came back to profitability years later, and has prologue its extraordinary success story since then.
Star-ification of Founder-CEO in the Tech World. Similarly to Bill Gates, Steve Jobs has been on the technology map for years as a a founding father of the digital revolution (Gates vs. Jobs video). After Bill Gates retired from Microsoft in January 2000, Steve Jobs was the last pioneer of that generation with worldwide profile. Since then many more names have erupted from the technology landscape such as Michael Dell (Dell Inc.), Jeff Bezos (Amazon), Larry Page and Sergey Brin (Google), and most recently Mark Zuckerberg (Facebook). Though no one in that short list garnered the media frenzy and adoration as Steve Jobs, surely someone else will step up.
Technology For Everyone. Until recently, the technology world was defined, understood by and built for the gadget-loving, computing enthusiast community. The cutting edge products were more for the geeks,who were clearly a separate and distinct segment from the rest of the human beings. Steve Jobs, by designing elegant and intuitive objects, has proven that technology could be understood and used daily by people who do not come from a technological background. As long as the object in question was simple to use, designed with taste, and with high reliability and quality, a certain sizable niche of the population (the more affluent however) could understand what that machine can do for it.
Importance of a Team of Experts. Although he was the most iconic person of the company, Steve Jobs could not have done it by himself. When he returned to Apple in 1997 after an absence of 12 years, Apple already had Jony Ive as Chief Designer, and Philip Schiller, who eventually became Senior VP of Product Marketing. Over the years Steve Jobs created a team of experts that worked well together. Today Apple’s management team is considered to be the world’s reference in the consumer electronic goods.

Apple's Core: Who does What, via Fortune [Aug 25, 2011]
Think Big, Think Ecosystem. It was true for the iPod and the Music industry, the iPhone and the Telecommunication industry, the iPad and the Media industry and hopefully the iCloud and the Hardware industry. Today’s innovation has to make strategic sense from an entire ecosystem standpoint. A product, beautifully designed and fully integrated in Apple’s case, has to appeal to both consumers and industry at the same time. The “Build It and They Will Come” time has long faded away and countless of technology companies have and are still making the same mistake of not thinking through the end-to-end solution for buyers.
Speed of Innovation. Despite its 46,600 full-time employees and 137 stores around the world in 2010, Apple is still managed like a startup with a lean management, small and flexible team and clear goals. To execute well and fast, Steve Jobs implemented a strong management style and micromanaged deadlines. Most importantly, by vigorously championing its “integrated” ecosystem (Hardware coupled with Software) against the “fragmented” environment, Steve Jobs established the first “closed” technology platform that could compete fiercely with the “open” Internet. So since Apple controls everything within their 'closed' world, development and go-to-market cycle time is significantly reduced. The Apple method has recently reached its maximum effectiveness and was rewarded by the financial market with a 52% innovation premium on the stock price.
Reinvention of the CEO Role. Like no other, Steve Jobs has redefined the role and expectations of a modern CEO, becoming the ultimate spokesperson, salesperson and marketer for his company and products. Cries of "We love you, Steve!" are emitted at Apple events from fans, and they will surely miss the iconic presence and showmanship of Steve Jobs in the coming product launches. Perhaps he might be able to redefine the role of a modern Chairman of the Board, if his health will permit.

“One more thing”... there will be a before and an after Steve Jobs as CEO at Apple Inc, the same way there is a before and an after Bill Gates as CEO at Microsoft. But in creating beautiful, powerful and simple-to-use devices, Steve Jobs has managed to expand technology beyond the small technophile community and teach the world how to innovate across industries.

And we can all thank him for that.

HP's New Business Strategy

2011-08-26T07:00:00.002+08:00

It was a busy day for Hewlett-Packard, the previous Thursday, August 18, 2011. Within the same day, HP announced that the company would

Acquire the British enterprise information management software company, Autonomy Corporation plc, for U$10.3 billion in cash (or U$42.11 a share), a 64% premium from their last trading stock price.
Evaluate strategic alternatives for their Personal Systems Group (PSG), including the separation of its PC business into a separate company through a spin-off or other transaction.
Name former IBM John Visentin, as executive vice president of HP Enterprise Services, replacing the retiring Tom Iannotti.
Shut down operations for webOS devices and explore strategic alternatives for webOS software.
Discontinue operations for the TouchPad and webOS phones.
Revise full year FY11 revenue guidance to U$127.2-127.6 billion, down from its previous estimate of U$129-130 billion.

During the FY11 Q3 financial result conference call that followed, HP’s CEO mentioned that the day's news are about transforming HP for the future:

“… I'm taking ownership for these decisions and investments with a focus on driving actions that deliver value for shareholders as we shape the new HP.” — Léo Apotheker, HP CEO [Aug 18, 2011]

Since the Q3 announcement and despite higher quarterly earnings HP’s stock plunged by 20%. More significantly the company's stock price fell close to 45% since the appointment of Léo Apotheker as HP’s new CEO on September 30, 2010.

What Is HP Today?

HP is one of the world's leading ICT company in terms of net revenue, U$126 billion in FY10, up 10% from previous year. The non-GAAP operating profit for the same FY10 was U$14.4 billion. With over 324,000 employees worldwide as of October 31, 2010, and over 1 billion customers around the planet, HP is the first ICT company that first crossed and stayed above the symbolic U$100 billion in yearly revenue since 2007.

The Palo Alto-headquartered company is ranked as number 28 in the 2010 Global Fortune 500, second after the South Korean Samsung Electronics (ranked # 22) in the ICT category. The company ships more than 1 million printers per week, 48 million PC units annually and one out of every three servers worldwide. Similarly to Microsoft, HP is a leader in both the consumer and the business segment at the same time.

After Agilent Technologies' spin-off from HP in 1999 as an independent company (a U$8 billion revenue company with 47,000 employees), HP decided to grow by acquisition at a frenetic pace. HP announced its merger with Compaq in September 4, 2001 for U$25 billion in stocks. This move was considered at the time as the biggest merger ever in the ICT industry and the most risky acquisition. It has since then never been topped, and is now a study in business schools as a best practice post-merger integration execution.

Mercury Interactive in 2006 (for U$4.5 billion), EDS in 2008 (for U$13.9 billion), 3Com in 2009 (for U$2.7 billion), Palm in Apr 2010 (for U$1.2 billion), 3PAR in Sept 2010 (for U$2.35 billion), ArcSight in Sept 2010 (for U$1.5 billion) are the key multi-billion dollar acquisitions from the Palo Alto company.

Source: HP Financial Results [Aug 2011]

But on August 6, 2010, CEO Mark Hurd resigned, joining subsequently Oracle as Co-President. Cathie Lesjak assumed the role of interim CEO, and on September 30, 2010, Léo Apotheker (ex SAP Co-CEO) became HP's new CEO and Ray Lane (ex-Oracle President and COO) was elected to the position of non-executive Chairman at HP.

“In losing Mark Hurd, the H.P. board failed to act in the best interest of H.P.’s employees, shareholders, customers and partners. The HP board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.” — Larry Ellison, Oracle CEO [Aug 9, 2010]

Since then, HP and Oracle have turned from close partners to bitter antagonists fighting at every possible level, including legal.

HP by the Numbers

Based on the FY11 Q3 earnings report, HP's revenue is from four major business units: Services (29%), Enterprise Servers, Storage and Networking (17%), Personal Systems Group (31%) and Imaging and Printing Group (20%). The remaining 3% are from HP Financial Services, and HP Software.

Source: HP, FY2011 Q3 (Aug 2011)

Personal System Group (PSG) and Imaging and Printing Group (IPG) together represent 51% of the company’s revenue but are low gross margin business (PSG has 5.9%), or are shrinking fast (IPG growth -10% Q/Q). On the contrary, the other components of HP business (Storage, Servers and Services) are growing moderately (single digit growth) and have more motivating margins (around 15%).

Source: HP, FY2011 Q3 (Aug 2011)

With already small and ever decreasing margins, and tremendous competition from Asian manufacturers, HP's core business (PC and Printer) is less attractive. The growth by acquisition has reached its limits, and does not provide enough consolidation upside and cost cutting benefits to outgrow competitors.

Source: Gartner (July 2011)

The economic crisis combined with the introduction of intelligent devices from competitors in the consumer segment (smartphones and tablet PCs) have forced HP to take action.

“Secular trends impacting our PSG business as consumers are changing the use of the PC. The tablet effect is real and sales of the TouchPad are not meeting our expectations.” — Léo Apotheker, HP CEO [Aug 18, 2011]

In this new "Post-PC" era, Smatphones are expected to take over the PC world in 2012. The trend seen in Japan years back is now coming to wash the shore of the world anytime soon.

Source: Morgan Stanley (Nov 2010)

HP needed to shift its strategy and the appointment of Léo Apotheker was the answer.

HP's New Strategy

At an HP analyst summit this March, Léo Apotheker outlined the new direction that the company should take to recover fat margins and past stock price. He shared a new strategy that relies heavily on analytics software and being a cloud platform for consumer and business segments. HP’s new vision is to provide seamless, secure, context-aware experiences for a connected world.

“As an executive who has spent most of my career primarily in software, it is a world I know well.” — Léo Apotheker, HP CEO [Aug 18, 2011]

With a forecast for worldwide IT spending at around US$3.7 trillion in 2011 as companies migrate to the cloud and spend more on software and IT services, it is clear that the money is in the cloud itself, services sitting on the cloud but not in the devices that reach the cloud.

Source: Forrester (Apr 22, 2011)

Léo Apotheker sold his vision to the HP board last August, and after three quarters of observations he is now executing his strategy. Placed in this context, all six announcements mentioned in the introduction of this entry make sense and should have been welcomed by the ICT insiders and financial analysts for the following reasons:

HP is spinning off a low margin PC business to generate cash for future software acquisitions. Printers, though it is still an interesting category with descent margins thanks to the ink cartridges, could be the next business to be divested.
John Visentin will bring the know-how and culture from the leading competitor (namely IBM) in the cloud computing and services business.
Both webOS and TouchPad experiments are shut down since it no longer fits in the new 'Cloud & Software' HP strategy, and should be divested.
Autonomy acquisition makes sense since HP would like to be the leading company in the 'Cloud & Software' market. For years the British company has been a reference in unstructured and structured data search and will represent the core of the next HP revenue opportunity.

What Might Come Next?

After a difficult 12 to 18 months anticipated spin-off exercise, the Personal Systems Group (PSG) could eventually be traded on the NYSE. With U$40.7 billion in revenue (FY2010), the new subsidiary would still be in the Global Fortune 500 list. This new company (Michael Dell sarcastically called it Compaq) could live independently from HP or be sold to any PC manufacturer or another player after a few months of operation (same as Motorola Mobility did recently).

The Imaging and Printing Group (U$25.7 billion revenue in FY2010) could be next in line if the PSG divestment do not bring enough cash, or if margins and growth start to decline as well.

Depending on HP's financial health (today it only has U$12.9 billion in cash before the Autonomy acquisition), more acquisitions in the software arena is highly likely.

WebOS could be sold for its patent portfolio (+1,500 patents) to one of the big three mobile players (Apple, Google or Microsoft), or to any underdog mobile manufacturer with some independent aspirations, such as HTC, ZTE or Huawei, if legal concerns and financial appetite align.

Source: HP TouchPad

The TouchPad incident (49 days of existence) and the following fire sale fiasco should be forgotten as a mere distraction. Although, at the discounted U$99 price, HP found what the mass market wants to pay for a tablet. The tablet PC will now be a battle between the leader Apple’s iPad (74% market share in 2011), newly self appointed contender Motorola-Xoom-Google, and the hopeful Amazon future tablet.

In short, HP has definitely turned Mark Hurd’s page and moved away from the post-PC debate to go back to its core business: helping its business customer. If Léo can do the impossible turn-around that Lou did at IBM, HP could be back to business…

Google Acquires Motorola Mobility

2011-08-19T09:05:00.028+08:00

On Monday, August 15, 2011, Google and Motorola Mobility Holdings announced that they have entered into a definitive agreement under which Google will acquire Motorola Mobility Holdings for U$40.00 per share in cash, representing a total of about U$12.5 billion. The price corresponds to a premium of 63% to the U$24.47 closing price of Motorola Mobility shares on Friday, August 12, 2011. The premium paid by Google is high enough to discourage any serious counter offer.

The transaction, subject to customary closing conditions including regulatory approvals in the US, the EU and other jurisdictions, has been unanimously approved by the boards of directors of both companies, and is expected to close by the end of 2011 or early 2012.

During a joint conference call, Google executives reaffirmed that Motorola Mobility will remain a licensee of Android and Android will remain open. Google will also run Motorola Mobility as a separate business.

“Our vision for Android is unchanged and Google remains firmly committed to Android as an open platform and a vibrant open source community. We will continue to work with all of our valued Android partners to develop and distribute innovative Android-powered devices.” — Andy Rubin, Senior Vice President of Mobile at Google [Aug 15, 2011]

The official reason for this surprising acquisition has been clearly laid out by the recently re-appointed CEO and co-founder of Google, Larry Page: patents acquisition to defend Android.

“Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies.” — Larry Page, Google CEO [Aug 15, 2011]

Under the terms of the transaction, Google has been rumored to be forced to pay Motorola Mobility an unusual U$2.5 billion in reverse break-up fee if it fails to close the purchase, representing 20% of the transaction (more than the median 4% last year). On the other side, if Motorola were to decide not to go through with the deal, it would have to pay Google a U$375 million in a break-up fee, or 3% of the deal valuation (industry standard).

The biggest acquisition so far in its 12-year existence and 100-plus acquisitions will cost Google about a third of its U$39.1 billion cash reserves (as of June 30, 2011). The transaction price is equivalent to 3.2 quarters of Google net income with 2011 Q2 financial results as reference [(U$12.5 billion – U$3.2 billion = U$9.3 billion) / U$2.9 billion = 3.2 Quarters], if you remove the U$3.2 billion in cash, cash equivalents and cash deposits on the balance sheet from Motorola Mobility's latest financial release [2011 Q2].

Most of the major Android partners have officially endorsed the deal, and welcomed Google to their side in the fierce handset-maker patent battle that is happening in the world currently. Until now, no telecom company besides France Telecom have mentioned anything regarding the acquisition.

Upon the announcement, Google stock price fell 1.2% and Motorola Mobility was up by 56%. More surprisingly, other players in the industry such as InterDigital Inc. (down 14%), Microsoft (up 1.6%), Nokia (up 10%) and RIM (up 10.3%) were also moving dramatically, indicating that the story is far from over, and is much bigger than it seems.

What Is Motorola Mobility Holdings Anyway?

Motorola was created in 1928 with its first product being a battery eliminator. The name Motorola ("Motor" and "Victrola") was adopted in 1930, and has been used as a trademark since the 1930s.

Motorola Logo in 1947
Source: Etiziano.com

Considered to be one of the oldest brands in the US technology industry, Motorola has been most recently in financial trouble and seen as past its prime. Once considered the Apple of the 90's, Motorola was dominating the wireless market in the mid-90's (StarTAC’s flip phone) and mid-2000s (RAZR). In 1994, Motorola claimed 60% of the US market in wireless phones [Herschel Shosteck Associates], today the company has 14.5% of the US market [comServe Aug 2011].

In the last quarter of 2007, Motorola's handset division recorded an operating loss of U$1.2 billion. After many rounds of lay offs in 2008, cost cutting measures during the economic downturn and a spin-off plan for a later divestment, Motorola has managed by mid-2010 to stabilize the device division.

On February 11, 2010, Motorola finally announced a split into two independent, publicly traded companies. The two new companies were called Motorola Mobility Holdings (NYSE: MMI; cell phone and cable television equipment company) and Motorola Solutions (NYSE: MSI; government and enterprise business). Motorola Solutions is considered to be the successor to the previous Motorola.

Since the beginning of 2011, shareholders, led by billionaire activist Carl Icahn, were desperately looking for buyers. Motivated by Nortel’s recent patent sale, the largest-ever patent auction in recent history (U$4.5 billion), Icahn urged Motorola to explore alternatives for its own patent portfolio.

Monday's Google-Motorola deal will net Icahn a considerable return. His 26.8 million shares are now worth over U$1 billion, up from U$655.8 million last Friday.

What Does Motorola Mobility Sell?

As of December 31, 2010, Motorola Mobility and its subsidiaries had approximately 19,000 employees worldwide. Motorola Mobility divides its business in two distinct categories:

Mobile Devices segment: smartphones, feature phones, voice-centric phones, and media tablet devices. Mobile Devices net revenues represented 68% of Motorola Mobility’s combined net revenues in 2010.
Home segment: interactive set-top boxes, IPTV systems, and customer premises equipment (CPE). Home net revenues represented 32% of Motorola Mobility’s combined net revenues in 2010.

Motorola Mobility Holdings Financials
Source: MMI Form 10K (Dec 31, 2010)

Motorola Mobility’s products are primarily sold through wireless carriers, network and cable operators, distributors and to end consumers. In 2010, aggregate net revenues from their five largest customers represented approximately 49% of the company net revenues. During 2010, approximately 28% of net revenues were from Verizon Communications. In 2010, the largest markets by locale of end customer were: North America (65% of market revenues), Latin America (14% of market revenues), followed by China, Europe and Other Markets (7% each).

Motorola’s Revenue and Operating Income (in U$ Millions)
Source: Silicon Alley Insider (Aug 15, 2011)

Motorola Mobility has approximately 24,500 patents and patent applications, worldwide. The Mobile Devices business segment alone has approximately 15,200 granted patents and 6,200 pending patent applications worldwide related to various industry standards, including 2G, 3G, 4G, H.264, MPEG-4, 802.11, open mobile alliance (“OMA”) and near field communication (“NFC”).

The Home segment has approximately 1,900 granted patents and 1,300 pending patent applications worldwide, including MPEG video compression, ATSC for digital TV transmission and DOCSIS for data transmission over cable systems.

In its latest financial quarter of 2011 Q2, Motorola Mobility announced that the Mobile Devices division sold 4.4 million smartphones, 440,000 tablets and 6.2 million feature phones, a 40% year-over-year growth; saw U$3.3 billion in revenue, up 28% from 2010 Q2. The second quarter gross margin percentage for Motorola Mobility was 25.9%, compared to 25.5% in the second quarter of 2010. For the full year, the company expects shipments of smartphones and tablets to be between 21 and 23 million units, including 1.3 to 1.5 million tablets. In the Home segment, Q2 revenues were U$907 million, up 2% year-over-year.

Despite announcing a first time in 3 years U$0.22 a share dividend, a share repurchase program of U$2 billion through the end of 2012, and a U$1 billion year-to-date of foreign cash repatriation to the US in their 2011 Q2 quarterly earnings call, the Motorola Mobility stock price stayed flat.

Worldwide Mobile Device Sales to End Users in 2010 (Thousands of Units)
Source: Gartner (Feb 2011)

Simply put, Motorola Mobility is a troubled handset manufacturer trying to resurrect itself after a 3-year long and difficult restructuring, in a low margin and competitive business, centered mostly in the US with a strong brand name and a large patent portfolio in the mobile industry. The company has been cleaned up, trimmed down and was up for sale.

Meanwhile, What’s Been Happening in the Mobile Industry?

Since the introduction of the iPhone in June 2007, the mobile industry has shifted to more innovation and more functionality stuffed in the small handset. This shift imposed on telecommunications companies by Apple, initially in the US and subsequently around the world, created a new category in the mobile industry called smartphones. Essentially driven by consumer demand, the industry is following Apple's footsteps with large touch screen interface, more features and higher price.

The Smartphone Landscape Worldwide, 2011 Q2
Source: The New York Times, Gartner (Aug 15, 2011)

In just four years, Apple managed to create a large ecosystem with its closed, proprietary solution of hardware and software, forcing telecommunications companies around the world to accept their sale conditions and coercing leading content providers to accept the iPhone (and now iPad) device as the device of choice in the "post-PC" digital world. In 2010 Apple sold almost 40 million iPhones, and had recently, albeit briefly, topped Exxon as the most valuable public company in the world at U$350 billion in market capitalization. With a most-wanted and now available everywhere device, Apple has captured 66% of the profit of the smartphone category in 2011 Q2 around the world, among the top eight manufacturers.

With its magic operating formula and high quality devices strategy, Apple has managed to save U$76.2 billion in cash and marketable securities [June 30, 2011]. Apple has become the world’s largest smartphone vendor by revenue, profit and by volume with 18% market share worldwide [Strategy Analytics, July 29, 2011]

Operating Profit from Mobile Phone (U$ billion)
Source: BGR (Jul 29, 2011)

Google entered the mobile industry from a different angle. Google wanted their OS on all the mobile handsets but did not want to build any devices.

“We’re not making hardware. We’re enabling other people to build hardware.” – Andy Rubin, Vice President of Engineering for Android at Google (Nov 2, 2009)

Despite, and perhaps due to, its marginal and unsuccessful attempt to sell its own phone hardware (Nexus One and later, Nexus S) Google decided instead to build a modern OS for all mobile manufacturers, and distribute it for free. Since its inception on November 5, 2007, Android has been activated on over 150 million devices worldwide, with over 550,000 devices turned on every day, through a network of 39 manufacturers and 231 carriers in 123 countries.

Market share for Google’s Android mobile OS hit 48% worldwide in the second quarter of this year [Canalys Aug 1, 2011] and 39% in the US [ComScore July 5, 2011].

In U.S. Smartphone Market,
Android is the Top Operating System, Apple is the Top Manufacturer
Source: Nielsen (Jul 28, 2011)

At this point, all other mobile manufacturers are in any one of the three categories: (1) dependent on Google for their OS (Samsung, LG, HTC, Motorola), (2) changing strategy altogether (Nokia, Windows, Palm), or (3) fighting for a piece of the action (RIM, Sony Ericsson, Sharp, ZTE).

What Is This Patent War About?

It is not the intent of this post to investigate patents and the legal mechanisms to encourage, protect, or prevent innovation altogether (Pros vs. Cons) but rather, to explain what is happening at the moment in the mobile industry as it relates to patents.

It is hard to say who started the war, but the battle today is certainly difficult to follow and very ugly. The bottom line is that companies with large patent portfolios are suing new incumbents for a piece of the trillion-dollar mobile industry.

Who Is Suing Whom in the Mobile Industry
Source: The Guardian (Oct 8, 2010)

The revenue in the mobile industry is shifting towards the smartphone business. Although the BoP consumers (bottom of the pyramid) still need feature phones, margins in the high-end device market segment are too attractive to let Apple clean the table without even trying to challenge them and their 60% gross profit margin per iPhone. One way to slow down competitor expansion and generate sizable revenue is to ask for a license fee per device sold for patent infringement.

Rumors mentioned that Apple is due to pay Nokia U$11 for every future and past sold iOS device in the recent June settlement. Microsoft has demanded that Samsung Electronics pay U$15 for each smartphone handset the South Korean company makes based on Android OS, echoing the U$5 per device HTC is already paying to Microsoft for every phone it is making with Android as its OS. It is easy to speculate that Microsoft could end up making more money in license fees against Android than from its own mobile business.

Most such fees have been passed down to consumers in the form of a price hike, and not absorbed by handset manufacturers. The real objective of this patent war is to reach a cross-licensing agreement between the large mobile handset players and to force other smaller, patent-light players to forego their strategy when facing a lengthy and expensive legal battle. Google and its 500 patents is very new in this tactic compared to Apple's 4,000 and Microsoft's 17,000 patent portfolio.

Number of Mobile Patents for Android OEM’s
Source: Global Equities Research analyst, Trip Chowdry; via eWeek (May 10, 2011)

After the U$450 million acquisition of Novell’s patents by the “CPTN” group (including Microsoft, Oracle, EMC and Apple), and Nortel’s 6,000 patents by the “Rockstar” group (including Microsoft, RIM, EMC, Ericsson, Sony, and Apple) for U$4.5 billion, Google had no other option but to consolidate its patent portfolio at any cost or give up its mobile strategy. Only a few plausible companies are on the list for a quick and easy snap: Motorola (17,000 patents), InterDigital (8,800 patents), and RIM (2,033 patents).

Immediate Consequences of the Motorola Mobility Acquisition

The Google goal of reaching the most mobile devices on the planet has been reached and today Google achieved what it wanted when it ventured into the mobile space four years ago: to establish its name, credibility and loyalty with consumers. It is now time to convert this massive market share into a more steady revenue. Android generated U$5.90 per user in mobile advertising in 2010. But the figures are still pale compared to selling high-end phone devices (Apple makes U$370 in profit for every iPhone sold).

The Mountain View company has yet to find the next billion dollar revenue stream, as 97% of Google’s revenue is from advertising. With the Motorola Mobility acquisition, Google just entered a new billion-dollar business with a strong US brand name. The mobile handset manufacturing business could be an interesting add-on to the core advertising business, if tighter development and integration could be done between software and hardware, somewhat like Apple.

On the contrary, if Google can convince its handset manufacturer partners that the new acquisition is not a threat to their existence (the same way it managed the Mozilla relationship with its Chrome in-house development), Google would succeed where neither Palm (WebOS license) nor Apple (iMac license) have.

But a likely scenarios is after some time, the majority (if not all) of current Android partners (HTC, LG, Samsung, ZTE, SonyEricsson among others) may seek an alternative to the Open Handset Alliance. The Motorola Mobility and Google relationship will naturally develop into a tighter collaboration, and current Android partners may feel like second-class citizens. In such a case, Windows Phone 7, MeeGo, Bada, WebOS or HTC Sense could be viable OS alternatives for any of these handset manufacturers.

When this happens, Google can eventually streamline its handset product portfolio and software releases, as well as switch Android from open source to proprietary (i.e., becoming similar to Apple, RIM), thereby addressing the overwhelming concerns over device fragmentation of the Android ecosystem, the same concerns that choked the Symbian platform just a few years ago.

What’s Next?

If the three main deep-pocketed players (Apple, Microsoft, Google) consider the patent war finished with this last announcement, then no new acquisition will emerge in the future. If not, more companies will be targeted: RIM, Nokia, Alcatel-Lucent, Kodak and InterDigital seem to be the likely candidates. Sprint could be a stretch.

Google may be spending the next months understanding the handset manufacturing business, divesting parts of the non-core business (Motorola features phone, voice-only phone) or exiting strategically challenging areas (China), and investing in next business ventures (Google TV merging with Motorola’s TV set-top boxes). A surprising and less likely scenario could see Google keeping the patent portfolio only and selling the manufacturing business to an Asian partner.

Whatever Google chooses to do with the Motorola Mobility acquisition, now the Mountain View company became the only mobile company that might be able to compete globally with Apple head-to-head... at least until the Windows-Nokia reboot.

iCloud: Apple’s Late Mover Advantage in Cloud Computing

2011-06-17T09:28:00.002+08:00

On June 6, 2011, Apple introduced the iCloud. This new, free service will automatically store Apple devices' content on the cloud, and synchronize all stored content and applications across one's iPhone, iPad, iPod touch, and Mac. The iCloud can synchronize up to 10 Apple devices and will be available in the US beginning this fall. It includes the App Store, iBookstore, iDrive (5GB of free cloud storage for mail, document storage and backups), Photo Stream and iTunes.

“iCloud keeps your important information and content up-to-date across all your devices. All of this happens automatically and wirelessly, and because it’s integrated into our apps you don’t even need to think about it—it all just works.” — Steve Jobs, Apple CEO [June 6, 2011]

To avoid a painful and time consuming upload process, particularly regarding music files, Apple will also offer in US a new U$25/year subscription-based service called iTunes Match that scans all music on all connected devices, and match those music files with a replacement 256 kbps AAC DRM-free online version from iTunes. If a file cannot be matched to the 18 million-plus songs in the iTunes Store, then it will be uploaded to the iCloud.

Apple, who recently acquired the iCloud.com domain name for a supposed U$4.5 million, has definitively stepped into the cloud business. Its brand new U$ 1 billion and 500,000 square foot data center facility in North Carolina is another stepping stone and commitment in that market.

Source: Apple [June 06, 2011]

Up until now Apple considered the PC/Mac as the central digital hub, the ultimate customer device used to manage and store all digital music, photos, videos, and documents. Today the Cupertino, California-based company is changing its philosophy and proposing a Post-PC era solution by bypassing the PC/Mac altogether.

The iCloud and related iTunes Match services are not revolutionary in themselves. Many companies already offer such services to early adopter consumers. Even just in online music streaming, Amazon Cloud Drive, Google Music, MOG, Rdio, the recently IPO-ed Pandora, and Spotify have long been in the market.

What differentiates iCloud from the rest of the pack is its:

[1] Apps strategy, giving consumers a better experience since streaming will be local yet ubiquitous through automatic synchronization and

[2] Its landmark business agreement with the four major music companies: Warner Music Group, EMI Music Group, Universal Music Group and Sony Music Entertainment. Apple is expected to keep 18% of the iTunes Match revenue (U$25/year subscription fee, advertising) while 70% will go to the record labels, and the remaining 12% to music publishers holding the copyrights. Apple benefits from its large music market penetration in the US (26.7% of all music sold in US and almost 90% of the online music market in US), and yet knows that is a small participant of the overall digital music experience. As far back as 2007, Steve Jobs estimated that less than 3% of music files on iPods have been downloaded from iTunes.

Source: Techgadgetx [June 07, 2011]

Though many in the industry are reviewing the competitive landscape of the online music and online storage consumer markets and how the iCloud has changed their course, a more interesting angle would be to probe Apple's overall strategy shift many years back and the winning formula that we all know today, using the iCloud as a case study example.

Into the Cloud

"What the hell is cloud computing?" — Oracle CEO, Larry Ellison [Sept 25, 2008]

According to the National Institute of Standard and Technology (NIST) from the US Department of Commerce, "Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction."

Cloud computing can be defined by three key service models, five essential characteristics, and four deployment models. From the demand side, Cloud is very appealing to companies who do not want to invest in costly infrastructure, evolving platform or software needs, and who want the flexibility to outsource complexity and maintenance. It essentially moves a business' IT costs from capital expenditure to operational expenditure, from developing and managing all IT needs in-house to using a third-party Cloud service provider and paying-what-they-use only. From the supply side, a company with significant excess capacity or capabilities can offer them as services to other companies and monetize what it will not use - i.e., Amazon's first foray into Cloud services.

Source: Memset & NIST [Feb 24, 2010]

From private (Data centers) to public (“The Cloud”) and everything in between, Cloud computing has managed to package itself with different scenarios for the benefit of many. Though initially targeted to businesses, Cloud services recently entered the consumer market and it is worth noting that today, Cloud computing is with Media Tablet, 4G and 3D TV at the top of the IT hype curve. Today, it is much easier to list which IT companies are not involved in Cloud computing rather than to list the ones who are. The hype has forced everyone in the IT industry to have at least a strategy, if not a plan of execution to satisfy customers or the PR machine.

Source: Gartner IT Hype Curve[Aug 2010]

In the consumer Cloud market, the three major companies are, in order of importance: Amazon as the leader, and Google and Microsoft, neck and neck together. All other companies are distant laggards or are focusing on one specific niche of the business, or proposing a Private Cloud computing (a.k.a. data centers).

Source: NQLogic [June 2011]

Amazon is the only Cloud service provider tackling all IaaS, PaaS, and SaaS. Since 2006, Amazon, with its Elastic Compute Cloud (EC2), has delivered scalable, pay-as-you-go compute capacity in the cloud to a vast array of companies such as Foursquare, Reddit, Eli Lilly or Netflix among 365,000 other web sites. More importantly Amazon helped to nurture the Silicon Valley and its load of start-ups through its Cloud services, to the point that the VCs are giving Amazon vouchers to entrepreneurs as gift certificates. The US government is also turning to the Amazon Cloud to save money, and ironically enough the Amazon servers were used during the recent attack against Sony’s PlayStation Network and its 77 million users that took the gaming network offline for almost an entire month. Today Amazon and its Cloud offerings are certainly the most mature, scalable and cheapest in the market, although it only represents 1.5% (U$500 million) of its U$34.2 billion revenue in 2010.

Microsoft has been building its Cloud computing capabilities essentially for its business customers, but developed several services for the consumer segment in that time as well in PaaS and SaaS. It recently announced that Windows Live has been investing in the space for over a decade, serving over 500 million customers with Xbox LIVE, SkyDrive, Hotmail and Messenger. Specifically for SkyDrive that launched in 2007, its 100 million worldwide users can access documents, photos and other files from anywhere for free online, using Windows Live Mesh to sync across their devices.

Finally, Google and its "all could be accessible from a browser" philosophy has been highly active on the consumer Cloud front from the beginning. Its U$2 billion a year investment in infrastructure for all of their services - e.g., Gmail, Google Docs storage capacity - show that Cloud business requires a significant capital investment and with scale achieved, it becomes easier to launch incremental new services from it. After all, if your mission is “to organize the world's information and make it universally accessible and useful” wherever and however they are created by consumers, why not help them to do it using your own infrastructure.

Source: Forrester [Apr 22, 2011]

The U$241 billion (by 2020) Cloud computing market is not that simple. Though many IT leaders are interested in moving more and more applications to the Cloud, taking full advantage of the cost benefit and reducing the implementation time cycle, the service has some pitfalls that needs to be considered. When one outsources capacities, one outsources responsibilities as well. The recent Amazon service disruption in the US East region, the cyberattack on Google's centralized password system, or the lack of harmonized privacy laws around the world are here to make us remember that the road is still long before we end up having a just few large data centers running the entire world's data.

What is Apple doing in the 'Consumer Cloud' computing business then?

This is not the first time that Apple tried to enter the Cloud computing business. Lala.com acquisition in 2009, and the now discontinued MobileMe (formerly .Mac and iTools) service were its earlier trials. Unfortunately both services did not really fit the “All Apps” Apple strategy.

This new move iCloud move provides two solutions to address Apple customer's pain points during their life cycle.

[1] The first one simplifies the content management between Apple devices, while disconnecting consumers from physical files and letting the interface as the main and unique experience. This forced disassociation with files will help to lock the consumer into the Apple ecosystem and minimize any other disruptive forces such as piracy or device competitors. The interaction screen is now owned by Apple, and no physical access is possible.

[2] Reduce cost and avoid turn around by forcing Apple consumer to backup all OS, applications and content on the cloud. An Apple customer will now be able to easily transfer content during an upgrade or a device replacement, after a loss or theft, reducing in return the internal customer care cost for this over popular demands.

The New Apple Strategy: Late Mover Advantage

Now with an extraordinary treasure chest on its balance sheet, a strong brand known around the world, and many success stories, Apple has evolved from its early days of Disruptive Innovation strategy to a Late Mover Advantage strategy. In the last decade, Apple (Steve Jobs, in reality) has observed what is promising on the market and what could reinforce the whole ecosystem, and then implements with its own, patented “one button” design while learning a lot from early adopter mistakes.

After several companies (Eiger Labs, Samsung, Creative, Diamond Multimedia) released the first portable Mp3 player starting in 1998, Apple released the iPod with a much nicer interface, on November 2001. Since then Apple has released the iPhone in June 2006, 4 years after Palm released its touch screen PDA; then the App Store in July 2008, 1 year after Facebook Platform; later came the iPad in April 2010, 10 years after the Microsoft tablet PC; and finally iCloud in Fall 2011, 4 years after Microsoft SkyDrive. No new revolutionary devices were released by Apple in the last ten years, but all of them are consistent with each other both in term of interface and design aesthetics. Apple has done tremendous work on the representation of the consumer device as a sexy and innovative status symbol in the market mindset.

Many companies in the world try to do the same Late Mover Advantage strategy (e.g., Microsoft, Samsung), but only Apple has perfected the secret recipe so far.

What do companies need in order to implement a successful Late Mover Advantage strategy?

[1] A strong balance sheet and access to a vast network of resources, both human and infrastructure. In a world of U$500 million data centers, only a few companies can actually deploy such a network in order to move ad hoc, at lightning speed. On one end of the spectrum, technology has enabled more flexibility and creativity (i.e., Silicon Valley start-ups) but on the other end, has set an enormous barrier to entry (i.e., Telecom network, Cloud computing data center). If a company wants to play across different markets, it needs a tremendous amount of cash.

[2] Find a niche consumer market. This market doesn’t have to be large. For example Apple has decide a long time ago that it will target only a small percentage of the total addressable market and never dilute the brand by going down the food chain, preferring instead to release more device models, and provide more updates quickly.

[3] Own a consistent and differentiable product/service catalogue. Since Jonathan Ive became the Senior Vice President of Industrial Design in 1997, Apple product catalogue has turned into a reference in the world of consumer product design. From the user interface to the physical design, it is clear today that Apple has a way of creating devices that are beautiful, powerful, yet easy to use. More importantly, each new device reinforces the entire catalogue with up-to-date features and a consistent interface. An Apple fan can turn on any new device and feel at home.

[4] Lock the PR machine. Apple has managed to create a loyal and outspoken influencer-fan base, triggering a strong media attention along the way. A recent study found that 15.1% of technology media stories were about Apple, compared to 11.4% about Google, and a mere 3% about Microsoft. This media and consumer bias fuels the PR machine with over-messaging and positive feedback, further reinforcing the brand in the market mindset. This PR machine is also stimulated by the extreme secrecy that Steve Jobs has imposed at the company.

[5] Learn from predecessors. With the iPhone, Apple created a stable and simple development environment for mobile developers. With the iPad, Apple ported over all media consumption, content management and basic interaction to a portable touch screen device. With the iCloud, Apple legalized the ever-growing music storage and content management pain point across multiple devices. Each time, Apple observed and simplified the crucial bottleneck in the ecosystem and built upon it. Along the way, human and technological resources were acquired but always rebuilt from scratch to satisfy ultimately the "All Apps" Apple strategy (Lala.com, FingerWorks, or Siri). This "observe before moving" strategy has paid off over the past decade and will continue on to the next ones.

What’s Next?

In the new internet platform war and its half trillion US dollar among the 4 + 1 internet companies (Amazon, Apple, Google, Facebook + Microsoft), Apple is the only successful enterprise that has consistently implemented the Late Mover Advantage strategy. It should not come to anyone's surprise that the next round of device created by Apple (so be it iFridge, iCar, iHouse ….) will generate explosive buzz and sales, and have the same design aesthetics and ubiquitous connectivity as its previous products and services.

Simply, Apple is the best "redesign" company in the world of consumer electronics today and perhaps tomorrow.

The Real Winners of the LinkedIn IPO

2011-06-03T13:20:00.020+08:00

On Thursday, May 19th LinkedIn raised U$352.8 million from its initial public offering on the New York Stock Exchange (stock symbol: LNKD). The social network company offered 7.84 million shares (8.3%) of its total 94.5 million shares.

Although the company was initially priced at U$45 per share by its underwriters, the trading opened at U$83 (+84%) and reached as high as U$122 (+173%) during the opening day, making the initial public offering the biggest internet IPO since Google went public in 2004. Two weeks later, LinkedIn stock price stabilized at around U$80 a share and the company had a market cap of U$7.5 billion.

Source: Wall Street Journal [May 20, 2011]

Many financial commentators and investors have mentioned that the valuation is totally out of proportion to be realistic and invoked the previous Dot Com bubble trends to explain their view point. The main argument relies on the fact that the company valuation is around 600 times its 2010 earnings of U$15.4 million, which puts it right next to the infamous theGlobe.com's 1999 IPO.

On the contrary, a handful of analysts advocated that the social network company was undervalued and that the company could be worth U$170 a share in a couple of years, basing their rationale instead on its fantastic, untapped global market potential.

“The market will do what it will do.” – LinkedIn CEO Jeff Weiner [May19, 2011]

In reality no one should be surprised that LinkedIn’s IPO with its small share amount (8.3%), affordable price (U$45 per share) and its diluted scheme would delight financial commentators and speculators.

What is LinkedIn?

In its SEC filing, LinkedIn proclaimed itself the “world’s largest professional network on the Internet with more than 100 million members in over 200 countries and territories.” All members publish their online résumé, link in with their professional connections and allow other platform members to see their professional social graph. The social network is used in two ways: by members to reach out to other members or see job postings, and by companies to identify and acquire talent in other organizations or publish job postings.

Source: LinkedIn's SEC filing

Often referred as the “Facebook for professionals”, LinkedIn was founded by Reid Hoffman in 2002. The company was incorporated in Mountain View, CA and had 14 employees and 78,000 users at the end of 2003. Initially appealing to senior executives and mid-level managers in the US, LinkedIn has since then diversified its base to incorporate even graduate students and grown more globally, translating its interface into six languages. Eight years later, with 100 million registered users, the American company is largely ahead of its closest competitors, the French Viadeo (30 million) and the German XING (10 million). Today LinkedIn has over 1,300 employees scattered across three continents (US, Europe, Asia through Australia and India). A new member registers every second, and the platform has 44 million users in the US and 56 million outside the US [March 2011].

Despite the low number of paying members and corporate customers numbering 4.8 million (though +130% since 2008), LinkedIn has managed to increase the number of Page View Per Person Per Month (+25% YtY to 23), Unique Visitors (over 60% over the last 5 quarters), and Time Spent on each page per visit over the years. LinkedIn visitors spend an average of 16 minutes on the site per month, compared with 309 minutes per visitor to Facebook [March 2011, Comscore].

LinkedIn's Revenue
Source: BusinessInsiders [May 18, 2011]

From 2009 to 2010, net revenue increased to U$123 million (102%), net income increased U$19.4 million (487%), and adjusted EBITDA increased to U$33.3 million (227%). In the three months ending in March 31, 2011, net revenue increased to U$49.2 million (110%), net income increased to U$0.3 million, (14%), and adjusted EBITDA increased to U$4.2 million, (46%,) over the same three-month period ending in March 31, 2010.

LinkedIn revenue is split three-ways: [1] the Hiring Solutions (42% in 2010), where companies can post unlimited job postings for a flat U$8,000 a year (compared to the typical professional headhunting services fee, which is 25-33% of the candidate’s base salary), and reach out to potential candidates; [2] the Marketing Solutions (33% in 2010), an ad platform; and [3] the Premium Subscriptions (25% in 2010) for extended features such as email, complete details information or full search capabilities.

Based on its recent first quarter's U$93.9 million revenue (up from U$44.7 million from Q1 2010, or +110%), LinkedIn could generate more than U$500 million for the entire 2011. LinkedIn is today's market leader in online Talent Acquisition, though capturing less than 1% of the U$85 billion total market worldwide [IDC, March 2011].

Who are the Winners of the LinkedIn IPO?

Corporations may choose to go public, and do an IPO to raise more capital and/or pay back early investors. With 1,300 employees, a steady revenue stream and a bright potential growth outside the US, LinkedIn was not seeking new capital to expand but was pressed to cash out by the current shareholders (Employees 30%; VCs, board members and financial institutions 70%). The IPO proposed 7.84 million shares at U$45 per share, for a total of U$352.8 million.

[a] Employees & the Founders
Based on LinkedIn's SEC filing, select employees were allowed to sell some of their shares. U$37.8 million was captured by the 28 lucky eligible employees, ex-employees and founding team members. Among them, it is worth noting that CEO Jeffrey Weiner, and Chairman and Founder Reid Hoffman each made over U$5 million.

[b] Financial Institutions
As part of the IPO, Bain Capital Venture Integral Investors, The McGraw-Hill Companies, Goldman Sachs and SVB Financial Group were also able to divest their share from LinkedIn. The four of them pocketed U$91.4 million in total.

[c] VCs & Board Members
Although no VC investor or board member sold any shares because they were not allowed to (yet), they are still the major beneficiaries of the IPO. Sequoia Capital invested U$4.3 million in a Series A funding in 2003; today at U$80 per share, their 17.3% ownership is worth over U$1.3 billion (a 287 multiple). Greylock Partners invested U$10 million in a Series B funding in 2004; today at U$80 a share, their 14.9% ownership is worth over U$1.1 billion (a 112 multiple). And Bessemer Venture Partners invested U$12.8 million in a Series C funding in 2008; today at U$80 a share, their 4.8% ownership is worth over U$366 million (a 29 multiple). When VCs sell off their combined 37.5%, the profit will generally go to their respective partners (20-30% in management fees), and the remaining proceeds to the fund investors, few will be seen back to the ecosystem.

What is worth mentioning is that the LinkedIn board member Michael Moritz, who is also a Sequoia Capital partner, will cash out twice. First, during the sale of the Sequoia Capital shares (17.8% of LinkedIn) and a second time during the sale of his personal shares (also 17.8%). And same for David Sze, a fellow LinkedIn board member and a partner at Greylock Partners, with his personal 14.9% equity of LinkedIn.

Source: LinkedIn SEC Filing

Since the IPO, LinkedIn has changed some of its shareholder mix, but still the company is majority owned by VCs, board members and financial institutions (61.2%); Founder and Chairman Reid Hoffman (20.1%), other employees and ex-employees (10.1%), and finally by the public market (8.7%).

[d] Day Traders
Shares of LinkedIn opened at U$83 on the NYSE, and went up 84% from its initial public offering price of U$45. By the market's 4 p.m. close, the stock had soared 109% to U$94.25.

LinkedIn Stock Price
Source: Google Finance [June 02, 2011]

LinkedIn chose 5 financial institutions as its underwriters for the IPO. Morgan Stanley, Merrill Lynch (Bank Of America), J.P. Morgan, Allen & Company and UBS were responsible for organizing the sale of the 7.84 million shares and set the price. During an IPO, among other things, underwriters commit to buying all released shares but plan to sell most of them to their biggest institutional clients. By undervaluing LinkedIn’s share price at U$45, while share price immediately soared and then stabilized at U$80, the underwriters gave a U$175 million gift to their best clients, amount not captured by LinkedIn.

Why Is This Important?

Besides the overwhelming noise surrounding this successful IPO, few comments need to be made in order to see the next trends that could prove to be a game changer in the technology industry.

[1] LinkedIn is changed forever.
Becoming a public company impose new rules and responsibilities. LinkedIn will be now scrutinized every quarter and commented on vividly as a new dominant internet company in the executive search market. It will also give a vehicle to current major shareholders (VCs, financial institutions, ex-employees and employees) to offload their shares. Finally it will give LinkedIn the possibility to raise more money later on if needed. One thing for sure, now it will be very difficult (although possible) for any company to acquire LinkedIn and make it private again.

[2] IPOs are back.
After 3 years of low activity in the IPO market, LinkedIn could be the kick-starter of a new era of the social media IPO tsunami. Looking at the buzz surrounding the most stable and less risky of all “Big Five” IPO contenders (LinkedIn, Facebook, Twitter, Groupon and Zynga), public investors are eager to jump on the next band wagon. Today investors prefer remembering Google and Apple stock prices rather than the Dot Com bubble to make their decisions. Groupon is officially the next in line for IPO (June 02), Zynga will follow later this year, then Twitter and “inevitably” Facebook.

“Nο one іѕ buying us, wе are going public.” – Facebook COO, Sheryl Sandberg [May19, 2011]

[3] LinkedIn set a precedent.
The American company has set a precedent for followers not only in the share offering (less than 10%), but also with the high valuation that followed the successful public introduction on the market. Many doubted the outcome of the offering as well as the large valuation mentioned in the press, but these numbers reflect the market reality. Prior to the IPO, LinkedIn was estimated to be worth around U$4 billion, compared to today's market cap nearing U$8 billion. Groupon (U$25 billion), Twitter (U$7.7 billion), Zynga (close to U$10 billion), and the crown prince Facebook (U$100 billion) will all be the beneficiaries of LinkedIn's IPO success.

[4] VCs need cash.
LinkedIn was forced to go public by its shareholders. After many years of dry outcome for its VCs, it was their time to cash out. Since there is only a handful of potential companies that could be monetized with a tremendous growth opportunity, VC firms are looking for big bets. However the main concern today is the same one as during past boom-bust cycles: too much money choosing too few deals will drive up prices. VCs will need to avoid making the same mistake as before in giving too much money in too many companies in similar spaces, which could potentially take margins out, creating a massive and rapid sector devaluation, called bubble bursting.

[5] Secondary market should be ignored for pricing.
One year ago you could have bought LinkedIn stock for U$17 a share on SecondMarket, a platform for buying and selling private company stock. Today they are worth close to U$80 a share.

LinkedIn Share Price on SecondMarket
Source: SecondMarket [May 19, 2011]

It is now evident that the small amount of volume traded on secondary platforms such as SecondMarket or Sharespost has negatively impacted the valuation of LinkedIn. For future IPOs these second market numbers should only be viewed as a reference but certainly not seriously incorporated for a public offering valuation.

[6] Many more IPOs will come soon.
At a risk of fueling a new technology bubble, most VCs from the Silicon Valley will divest their portfolio companies through IPOs as soon as possible. The rhythm to which the best and brightest,VC backed-technology companies will IPO in the future will accelerate, leading to a strong competition for public investments.

The next wave of IPO will arrive soon and it will be big. It might be a good time to read up on the theGlobe.com story again.

Microsoft Acquires Skype

2011-05-13T10:32:00.018+08:00

Late Monday night (May 10), Skype Global s.à r.l and Microsoft Corp. came to a final agreement under which Microsoft would acquire Skype for $8.5 billion in cash. The deal, approved by the boards of directors of both companies, is the biggest acquisition in Microsoft’s 36-year history topping the acquisition of the digital advertising company aQuantive on Aug 13, 2007 for U$6.33 billion. Skype will become a new business division within Microsoft, and Skype CEO Tony Bates (ex-Cisco executive) will report directly to Steve Ballmer as president of the Microsoft Skype Division. Microsoft decided against hiring investment bankers to help them with the deal, thus saving around U$30 million in fees.

Founded in 2003, Skype was most recently owned by a consortium of investors led by the private investment firm Silver Lake Partners (39.8%). Other members of the investor group include eBay International AG (30%), Canada Pension Plan Investment Board (15%), Joltid Limited in partnership with private equity investment firm Europlay Capital Advisors (14%), and Andreessen Horowitz (1.8%).

This acquisition is the second time another technology company has acquired Skype. On Sep 12, 2005, eBay bought Skype for U$2.6 billion but never really managed to take advantage of its potential and merely sold 70% of its shares to an investor group in Nov 19, 2009 for U$1.9 billion in cash and a note from the buyer in the principal amount of U$125 million.

Since then, Skype was rumored to be approached by major technology companies (Facebook, Google and Cisco) but managed to stay focused on its IPO, which was finally filed for last August. The unsolicited offer by Microsoft was in fact a quick (less than 6 weeks) and personal effort by Steve Ballmer himself, who insisted that Skype sign a “no-shop” clause to keep it from soliciting other bids.

Source: comScore, Microsoft & Skype [May 10, 2011]

A large majority of analysts, observers and investors over the past days have commented that U$8.5 billion is too high of a price for a company that still has yet to convert its more than 600 million users into a profitable cash cow. Microsoft is paying 40% more than Skype itself states the business is worth, according to its most updated IPO filing with 2010 data. In reality the price reflects the premium on current valuations (i.e., Groupon, Facebook, Twitter), past successful IPOs (Amazon, eBay, Yahoo! or most recently Google), and an optimistic starting base price of U$7 billion, what Skype's owners expected to generate from the planned IPO.

The upside is spectacular given the short amount of time, mere 18 months, the investors have owned the internet phone service since buying a majority stake from eBay. The internal rate of return was as high as 70% to 80%, unheard of in a private equity business where investments are held and evaluated typically for three to five years.

Skype Today

NQ Logic previously discussed Skype and its strategy in March 2010. Since then the company has managed to move fast on multiple fronts. Skype launched new products for mobile devices, including an iPhone app that has been downloaded over 50 million times, and another for Android; doubled its workforce; signed strategic partnerships with Avaya, Verizon, TV makers Panasonic and Samsung; and appointed Cisco Systems' seasoned executive Tony Bates as CEO.

Source: Skype.com [May 2011]

According to its latest IPO filing with 2010 data, Skype had a total of 663 million users (mostly non-paying), who made 207 billion minutes of voice and video calls, and sent over 176 million SMSs in 2010. The Luxemburg-based company grew its registered user base in 2010 by 39%, and its paid customers by 20%, now at 8.8 million users (1.3% of its total user base). Just in the fourth quarter of 2010, video calls accounted for approximately 42% of all Skype-to-Skype minutes. Skype is the leader in internet voice and video communications, with 107 million users per month connected for more than 100 minutes a month on average.

Source: WSJ [May 11, 2011]

In terms of revenue, in 2010 Skype generated U$860 million of net revenue, and its adjusted EBITDA was U$264 million. After paying its debt interests the company's net loss amounted to U$7 million (Skype has about U$725 million in borrowings and a revolving credit line of U$30 million).

If Skype was a Telecommunications company, it would be the number one in terms of user base, ahead of China Mobile and its 600 million users.

“And Skype is a verb, as they say.” — Steven A. Ballmer, Microsoft's Chief Executive [May 10, 2011]

The software company is the market leader in the multi-platform VoIP application, instant messaging, file transfer, and video conferencing markets over the internet.

Skype Fit

In its press release, Microsoft mentioned that "Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities. Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms."

Source: Microsoft & Skype [May 10,2011]

Although private platforms using internet technology to communicate using video are becoming quite common (Google Talk, Apple’s FaceTime, AOL’s AIM, RIM’s QNX-based BlackBerry or Cisco’s Umi), Skype is the only large platform supported across different OS, and able to connect to regular PSTN lines (SkypeOut to regular phone lines).

Combining Windows Live Messenger and its 330 million monthly active users with 40 million concurrent users, with Skype's 170 million active users and 30 million concurrent users, Microsoft would be merging the two market leaders of internet communications on both private platform and cross-platforms.

By making Skype a separate business unit, Steve Ballmer is also acknowledging that the application is already an appealing proposition to the consumer market as it stands, and with more advertising revenue could turn the VoIP software into a large part of Microsoft’s new strategy of “three screens and the cloud”. Ballmer recently said that online advertising contributes U$3 billion in revenue per year to Microsoft, and is the fastest growing part of Microsoft’s business.

At the same time, Microsoft with its deep expertise in the SMB segment, knows that today's small and medium companies need to communicate and collaborate more on daily basis across different places and different time zones while balancing out their costs. Microsoft Lync and Microsoft Exchange are both lacking the Skype's capability to call out to regular phone lines, and the acquisition will enhance Microsoft's offering in the Unified Communication market to SMB customers (a U$2.5 billion business a year according to research firm Synergy Research Group).

What's Next

Microsoft’s competitors will try to size up Skype’s potential rivals (Jajah, Fring) or maybe promote new or copyleft software (GNU Free Call, Exiga, Empathy, Blink or Linphone) onto their platform.

Upon regulatory approval later this year, Skype will just be another brand in Microsoft’s basket. Skype name will stay as is (like “Hotmail”) and hopefully the business unit will continue to grow thanks to the Microsoft's marketing machine and infrastructure investment to scale and finally stabilize the platform.

Skype will still be supported across different OS and devices (TV, mobile, PC, and Tablet). Some recent deals will be revisited (e.g., Avaya) and some others will be expanded (e.g., Facebook, Citrix). A new client for Windows Phone 7 will be released contrary to the initial plan.

But it will be a couple of years before the Skype defensive buyout can reveal itself as a success or failure. It will be easy to imagine that in a later release of Windows OS across the multiple screens (TV, PC, Mobile, and Tablet) a Skype client could be integrated directly onto and would create de facto the biggest social network ever created on the planet. The next May 27 conference about the “next major release” of Windows Phone could be a major indicator of Microsoft strategy.

Apart from Skype integration execution, the most difficult part would be for Microsoft to explain to all its carriers and telecommunications company partners around the world, that Skype is not a competitor and that they still can decide what to do on their network.

Conclusion

After last month's deal with Nokia, and Skype’s acquisition, Microsoft has decided to move forward in the mobile-telecommunication arena. The Redmond-based company is finally putting to use the U$42 billion (out of U$50 billion) of cash it has overseas. In partnering or acquiring the best pieces of technology outside the US, it avoids the 30% repatriation tax rate.

“We are in the middle of a transition in telecommunications from voice and video being a fixed hardware application to a software application sitting on top of the network.” — Marc Andreessen, Silicon Valley Tech Guru, [May 10, 2011].

By snatching Skype out of the hand of large technology companies (and especially Google and Cisco), Microsoft consolidates its leadership position in the Unified Communication in the business market, and peer-to-peer communication in the consumer market. This expensive acquisition (largest in Microsoft’s history) may seem too costly today, but if the Redmond company manages to create a new, seamless communication experience across multiple screens (TV, Mobile, and PC today; Tablet tomorrow), this deal could be seen in retrospect as the best move Microsoft could have made toward the lucrative global telecommunications industry with its trillion US dollar revenue a year.

Nokia-Microsoft Partnership

2011-04-29T21:42:00.018+08:00

NQ Logic had previously discussed the nomination of Stephan Elop as CEO of Nokia, but had not anticipated the new strategy that Nokia recently presented, a strategy that will forever change the mobile industry and most certainly the Finnish company.

When Two Giants Collide

Following Nokia CEO Stephen Elop’s "Burning Platform" memo on Feb 09, Nokia and Microsoft announced a new global strategic partnership two days later. Under the proposed deal, Nokia would adopt Windows Phone as its principal smartphone OS, gradually phase out Symbian and abandon MeeGo before its launch. The undeployed MeeGo, created last year from the merger of Nokia and Intel's Linux-based platforms Maemo and Moblin, was seen, until now, as a key initiative in Nokia's battle against Apple iPhone and Google Android in the high-end smartphone and tablet PC markets. Intel, who was kept in the dark until the announcement, has decided since then to look for new partners.

Mobile Devices Net Sales Mix
presented by Nokia CEO Stephen Elop and CFO Timo Ihamuotila,
at Nokia's Capital Markets Day [Feb 11, 2011]

Stephen Elop, an ex-Microsoft executive, considered for a moment Google’s Android OS, but he quickly turned to Windows instead stating that Nokia was seeking “sustainable differentiation” with some financial compensation for the transition.

“Two turkeys do not make an Eagle” Google SVP of Social, Vic Gundotra [Feb 09, 2011]

For some years now Nokia and Microsoft have been allies in the mobile arena, so this choice of a partner should not be seen as a surprise (though entirely moving to a partner's OS is). Nokia has had a license from Microsoft to connect its smartphones to Exchange e-mail servers since 2010, a modified version of Microsoft Office since 2009, and a preloaded Windows Live services on its phones since 2007. It seems almost normal that Microsoft, after developing and integrating applications on Nokia phones for so long, move down to the OS level and partner to plug the recent Windows Mobile 7 on Nokia’s hardware.

The Mobile Market Today

As previously explained, the mobile industry has a clear and unhealthy bias towards the US and its financial market. Though the US represents just 8% of the global mobile phone market in terms of revenue and 6% in terms of users, it has become the market maker for the rest of the world.

US Smartphone Market
by Nielsen & Engadget [Mar 03, 2011]

65.8 million people in the US owned a smartphone out of the 234 million Americans who used mobile devices (28%) according to comScore. The latest Nielsen research shows that Google's Android, Apple's iPhone and RIM's Blackberry are evenly sharing the US market with 30% each, leaving just 10% to their distant competitors (HP’s webOS, Microsoft's systems, Nokia’s Symbian, etc.). In the last quarter of 2010, Google finally managed to surpass Nokia's Symbian as the most popular smartphone platform since the smartphone industry took off a decade ago.

Most recently this week, after officially signing the partnership deal with Microsoft, Nokia decided to reduce its workforce by 4,000 people and transfer another 3,000 employees to Accenture (12% of its phone unit workforce). At the same time, Nokia has to change its Symbian source code to a non-open license, and begin to restrict its deployment around the world.

Quarterly Releases

In its latest Q1 2011 release, Nokia confirmed that its worldwide market share fell below 30% for the first time in over a decade, with declining smartphone sales, average sale prices, revenue, and profit. And all this while the overall mobile industry grew by 32% in 2010, according to Gartner.

Whereas Apple is doubling (+113%) its worldwide iPhone sales from last year and rumors have surfaced about an iPhone nano that could sweep the market once more, Nokia has just managed to expand its phone sales by a mere increase of 5% globally. Today, with just 4% of the global mobile phone market, Apple's iPhone accounts for over 50% of the total profit of the mobile industry (a U$600 iPhone costs U$187 in parts), where Nokia is below 10% in total profit.

Nokia Shares on NYSE
[Google Finance Feb 09 - Apr 25]

Nokia’s 23% drop in share price since the company announced its partnership with Microsoft speaks volumes about consumer and investor confidence regarding the new strategy and execution outcome.

Worldwide mobile OS shipments
by AllAboutMeeGo [Apr 21, 2011]

A new market trend is quite obvious in mobile. Apple, and more importantly Google [Nielsen] are on the rise, while Nokia is in decline not only in the US but also in the world.

So What’s Next

[1] Nokia’s Shareholder Concerns Addressed Temporarily
Stephen Elop was named Nokia CEO last year to primarily address shareholders' concerns about their valuation in the US. Squeezed between an aggressive iPhone revolution on one hand and an exponential Android OS adoption in the other, Nokia had no choice but to differentiate itself between these two value propositions and create a third ecosystem, to appeal to telcos.

Despite market leadership position everywhere in the world except the US, and across all mobile phone market segments, Nokia decided to get out of the software business once and for all and to concentrate on the hardware mobile business industry instead. The decision became to simply choose a partner. Microsoft with its know-how in the PC software industry, historical business relationship with Nokia, low penetration in the mobile arena, investment in the mobile industry, and its billion dollars in cash, Nokia choose the only plausible choice for itself. Nokia with an aggressive PR campaign has provided a clear yet dangerous strategy to its investors, outsourcing not only its financial future, but also its potential lucrative customer relationships to Microsoft.

[2] Microsoft Re-Enters The Smartphone Market
By partnering with its long time Finnish collaborator, Microsoft managed to maneuver itself in the top category of the mobile phone industry again. It secured a deal with a current market leader, and if successfully executed, Microsoft could end up being in its usual comfort zone: licensing software around the world across different devices.

Previous phone forays at Microsoft (Kin or Windows Mobile) proved that selling mobile is very different business from selling PCs or servers. Typically with mobile, telcos, not hardware manufacturers, decide what to offer to their end customers. In this partnership, Microsoft essentially outsourced the consuming and difficult relationship management with telcos to Nokia and will concentrate on its strength of software development. Nokia, which already manufactures and distributes over 400 million phones a year, will continue to focus on hardware, something Microsoft never mastered with Kin.

Microsoft is probably the real beneficiary of the partnership, not only on the short run but also in the long run if the deal happens to work out well.

[3] History Will Repeat Itself
In 1994, the dominant global provider of mobile phones was Motorola with 45% of worldwide market share. Six years later, Motorola's market share collapsed to 15%, while Nokia's had grown to a new leading position with 31% market share.

In 2004, Windows Mobile accounted for 23% of smartphone sales in the world and it was optimistically projected to overtake Nokia's Symbian to become the leading mobile OS. But in 2007, Nokia's dominant share of the global mobile phone market was close to almost 40%.

Today, Apple owns over 50% of the total profit of the worldwide mobile phone industry, and Android is scheduled to have over 50% of the US smartphone OS some time soon. History can also repeat itself with the rise and fall of these two Californian companies.

[4] The Market Will Stay Fragmented
Symbian and MeeGo are dead, and so are true open mobile ecosystems. The mobile world is becoming quite binary with on one hand a copy-left OS called Android that dresses all low-cost mobile hardware manufacturers; and on the other hand, many closed ecosystems addressing different market segments.

With its free licensing, Google’s Android OS will have a significant market share in a not so distant future (over 45% of the smartphone market in 2015, according Gartner and IDC) but will have a very difficult time monetizing its impressive penetration. With more proliferation comes the difficulty of maintaining different code versions across different platforms and Android development will start slowing down, lagging against its closed system competitors, becoming a victim of its own success.

The other closed systems will cash out and will position themselves toward a dedicated niche in the market place (iOS and Windows Mobile in the consumer segment and RIM in the business, while WebOS will need to create its own space). This segmentation will benefit all telcos (less traction) and will impact not only end users but also the developer communities slowing down innovation cycles. The supplier surplus created by the mobile revolution is in reality being captured by telcos (mobile data consumption) and the handset manufacturers (device + ecosystem).

[5] Nokia For Sale?
In outsourcing the software component of its mobile strategy, Nokia has officially ended its market leader position and therefore its ability to influence the mobile industry altogether. Despite its extraordinary financial results, Apple will not become the next dominant mobile player, because the company has always positioned itself at the top end of the price spectrum, refusing to go mass market. Ironically, Google’s Android seems to be positioned to be the next potential market mover and become the equivalent of what Microsoft is today in the PC industry.

Nokia and Microsoft will lose some precious months trying to integrate their respective functional entities and create a working relationship while merging two different company cultures. Markets might not be patient enough to wait for the miracle to happen, and it may not be long to have the "FOR SALE" sign appearing on the front porch of Nokia.

And what if the real long-term strategy of Microsoft was in reality to buy an undervalued Nokia?

AT&T Acquires T-Mobile USA

2011-03-25T01:00:00.005+08:00

On Sunday, March 20, 2011 AT&T and Deutsche Telekom AG announced that they have entered into a definitive agreement under which AT&T will acquire T-Mobile USA from the German parent company Deutsche Telekom in a cash-and-stock transaction currently valued at approximately US$39 billion.

The final purchase price tag consists of a cash payment of US$25 billion with the balance to be paid using AT&T common stock, subject to adjustment. In this agreement, approved by the Boards of Directors of both companies, AT&T has the right to increase the cash portion of the purchase price by up to US$4.2 billion with a corresponding reduction in the stock component, as long as Deutsche Telekom would receive at least a 5% equity ownership interest in AT&T.

M&A experts have said AT&T is paying Deutsche Telecom AG a significant premium for T-Mobile. JPMorgan valued T-Mobile about US$14 billion lower at US$25 billion, and even last December Bank of America-Merrill Lynch valued T-Mobile at around US$23.2 billion.

In the company press release, AT&T CEO Randall Stephenson estimated that total savings for both companies would reach US$40 billion, and acquisition will improve AT&T wireless voice and data network quality instantly. It will also get them closer to bringing future LTE (~3.9G) capabilities to more than 294 million American consumers, about 95% of the American population.

"This transaction delivers significant customer, shareowner and public benefits that are available at this level only from the combination of these two companies with complementary network technologies, spectrum positions and operations" — AT&T Chief Executive Officer, Randall Stephenson [March 20, 2011]

After regulatory approval, the combined entity will have more than 130 million subscribers (at the end of 2010, AT&T had 95.5 million wireless subscribers and T-Mobile had 33.7 million subscribers), increase AT&T’s total wireless revenue from US$58.5 billion to nearly US$80 billion, and increase the percentage of AT&T’s total revenues from wireless, wireline data and managed services to approximately 80%.

US Market Analysis

Placed in its own context, this acquisition is quite an astonishing opportunity for both T-Mobile and AT&T. Without a doubt the telecommunications industry in the US will be impacted dramatically.

According to the Telecommunications Industry Association (TIA), the US telecommunications industry represented one-third of the world telecommunications revenue in 2009 and employed close to one million people in the US.

The US Census bureau has estimated that in 2009 the total telecommunications revenue was at half a trillion US$ making it close to 3.4% of the US GDP.

Almost evenly split between wired, wireless and cable, all telecommunications companies have seen their revenue declining in every segment but wireless. With an ARPU (Average Revenue Per User) of US$48.16 in 2009 according to the Cellular Telecommunications & Internet Association (CTIA), the US market is quite lucrative and very competitive at the same time [note that iPhone ARPU is north of US$90].

With 292.8 million mobile phone subscribers in total (93.0% penetration rate), the US has still some room to reach the comparable level of mobile-heavy markets such as Hong Kong [187.9% penetration], Italy [147.4%] or Russia [147.3%]. With only 20% of users having Smartphones, but with an increase of 18% over the last 6 months in 2010, Americans are finally embracing the 3G revolution and migrating at a fast speed to what other developed markets on the planet have done a long time ago.

After the US federal regulators, the Department of Justice (DoJ) and Federal Communications Commission (FCC) approve the acquisition, the former Big 4 will become Big 3 with a clear winner as AT&T, followed by the distant second Verizon and the laggard third Sprint. The remaining 20 or so regional followers could only account for less than 14% of the total market. The US market will shift to a duopoly with little competitive room for a potential incumbent in this capital-intensive industry that is telecommunications.

Build, Buy, Borrow or Collaborate

Since the iPhone launch on June 29, 2007 and the Apple cult of PR machines, consumers and media, AT&T has been put under an unflattering spotlight. Dropped calls, network congestion, blind spots, or customer dissatisfaction seem to happen only on AT&T network.

The truth is that AT&T’s mobile data traffic grew 8,000 % since 2007 and by 2015 it is expected to be 8-10 times what it was in 2010. A decade ago mobile data traffic was non-existent and networks were only designed to carry voice and SMS but nothing more. By year-end 2010, AT&T was carrying around 12 petabytes per month of mobile traffic alone. Because cell towers are shared among all customers, a single iPhone heavy user is sufficient to impact all the neighboring users who could not use their mobile phone to call or send an SMS.

Source: Cisco Systems' Visual Networking Index
[June 2010]

Despite a US$2 billion commitment to upgrade their network in January 2010 and a tentative containment of their ever-hungry unlimited data plan users in June 2010, AT&T still had not managed to slow down the exponential mobile data growth or upgrade their network fast enough to catch up with users' appetite.

Facing such resource constraints, carriers could do several things to expand their wireless network:

[a] Build More Cell Towers.
In large agglomeration, where most mobile users are, in cities, it usually takes a very long time to have an approval site by municipalities, even though the FCC has recently put in place a “shot clock” regulation to expedite tower building approval. According to wireless industry lobbyists, in June 2008 there were 760 new tower placement applications nationally that have been waiting for approval for at least one year, and 180 applications that have been in wait at least three years.

[b] Buy More Spectrum.
Keeping the same infrastructure, carriers could also buy spectrum from the FCC, and augment instantly their bandwidth by directing the new air traffic from one bandwidth to the other, depending of course whether the mobile phone device can “speak” on the spectrum (nowadays it costs almost nothing to add an extra spectrum to a mobile phone; the latest Nokia N8 for example is a Penta Band). AT&T has recently acquired some spectrum slots from Qualcomm (upon FCC approval) or Aloha Partners but nothing sufficient to fix their current problem. Until now, the FCC has not released any more spectrum to keep up with the mobile data explosion, and do not intend to do so for some time, although it is aware of the problem.

“The explosive growth in mobile communications is outpacing our ability to keep up. If we don’t act to update our spectrum policies for the 21st century, we’re going to run into a wall — a spectrum crunch — that will stifle American innovation and economic growth and cost us the opportunity to lead the world in mobile communications.” — FCC Chairman, Julius Genachowski, [October 2010]

[c] Collaborate with Competitors' Cell Towers.
This is where it is becomes a bit technical, but it could be summarized like this. Verizon and Sprint use EVDO time division multiplexing and can share towers. AT&T and T-Mobile use GSM technology with Frequency Division and can share towers. EVDO and GSM are not compatible and cannot share towers. The bottom line is that beyond technology capability, tower sharing is only plausible if companies enter into a partnership, but this is extremely difficult when companies are fierce competitors.

[d] Borrow Competitors' Cell Towers.
In remote areas or second and third tier cities, private wireless companies have managed over the years to build local mobile wireless network. nTelos in Virginia, or Cincinnati Bell in Ohio are good examples of companies that have found a local market and provide competitive service to the big national carriers. Unfortunately alternative carriers are not located in large urban areas where the biggest problems reside. Renting cell towers are usually not done in dense urban areas where coverage is done exclusively by national carriers who compete ferociously with each other.

After having explored all different possibilities AT&T was convinced that an acquisition at the right price would be the only move left that could put them not only in the leading position, but also help them to leap forward in current infrastructure building, and give them some breathing room to build the next generation network called LTE. Cornered by the now non-exclusive release of the iPhone from competitor Verizon early this year, AT&T was looking for their next move to put them in a different league altogether. When rumors of a merger between Sprint [#3] and T-Mobile [#4] surfaced earlier this month, AT&T jumped in to offer the best deal possible to acquire T-Mobile from its German parent Deutsche Telekom.

Why Does It Make Sense?

With T-Mobile, AT&T is not just buying a rival but buying 5 years worth of infrastructure development and a customer-friendly company in the market place. In a single move AT&T has managed to acquire the only potential sizable competitor that could be integrated rapidly and have a high return on investment immediately on the acquisition completion date. Network integrations are indeed the easiest part in a telecommunication merger if technologies are compatible (which is the case in this acquisition).

The merger will guarantee the deployment of a robust LTE network to 95% of the US population, something neither company could achieve on its own. With the T-Mobile acquisition, AT&T will improve its total number of cell towers by 30%. In major markets like New York, San Francisco, and Chicago, the number of AT&T cell sites will grow by 25%-45%, and in many areas, the total capacity should simply double.

With no clear vision for its network future, T-Mobile has in reality put itself for sale, and the parent Deutsche Telekom was quite interested for a while in divesting a costly American investment (over US$50 billion).

The FCC and the DoJ will be tempted to block this acquisition because it would create a duopoly (Verizon and AT&T) with over 70% of the wireless market share. AT&T is already anticipating a long and difficult regulatory probing in the coming months, which is why the company has referenced many parts from the President Obama's State of the Union message in its dedicated acquisition website [mobilizeeverything.com].

The FCC and DoJ will finely scrutinize the acquisition and in certain cases will demand some adjustments to maintain some sort of competitive market in specific regional areas, but the lengthy battle will see in the end the last big telecommunications consolidation in the US market, and the colossal breakup fee (US$3 billion) will be remembered as an academic detail in the world of M&A.

Top 10 Days in 2010 for Technology

2011-01-06T13:36:00.019+08:00

The start of a fresh year is the perfect time to reflect and ponder on what happened.

After a frightening 2009 that will go down in the books as the year of the biggest economic recession since World War II, 2010 was the year of economic recovery and stabilization.

Emerging and Developing countries (with a powerful and hungry China) have bounced back from the crisis, leading the world economic recovery. Developed countries have not yet enjoyed the same growth rates. Greece and Ireland danced dangerously on the verge of bankruptcy but eventually were saved by the EU and IMF. England elected a new government, and a US Democratic President will have to deal with a Republican Senate for at least the next two years. Undaunted by sanctions, Iran has continued to pursue a nuclear program and neither North Korea nor Middle East countries have trumpeted political goodwill to bring prosperity in their respective regions. Mother earth was hard on countries like Haiti and Pakistan, and reminded us that climate change must be a higher priority in world debate.

On a brighter note, the Winter Olympics in Vancouver and the Soccer World Cup in South Africa distributed their fair amount of medals and managed to unite billions of people around the planet to watch TV.

The technology world was not shy either for major events in 2010. Here are the top 10 game-changing days for 2010 in the technology world.

January 12, 2010: Google leaves China

In response to cyber attacks on Google infrastructure that compromised the Gmail accounts of Chinese human rights activists, Google decided that they would provide unfiltered (or uncensored) Chinese search results, acknowledging the consequences and contemplating "having to shut down Google.cn, and potentially [their] offices in China". Google, by redirecting all search traffic to the Hong Kong office, managed to address the increasing complaint from American human rights activists while preserving their brand mission. But this also sealed their fate to exit a market that became too difficult to compete within, politically speaking. Google executed its long term exit strategy from China. Since then Baidu picked up Google’s search market share, and became a top performer on the Nasdaq. China, despite the economic boom, middle class rise and relative political calm, continues to isolate its 450 million internet users from the rest of the world.

April 3, 2010: Apple launches the iPad

The long-rumored Apple tablet, called the iPad, was introduced by Steve Jobs himself. The company sold over 300,000 iPads just in the first day, and had sold 7.5 million units within two quarters (by Sep 30, 2010). This long-anticipated revolution has changed the way consumers devour their digital content. Once again Apple managed to enter a new market late with a strong marketing buzz and slick design, and signed up enough content providers behind its paid wall to make it a blockbuster success. Neither the "Antennagate" of the iPhone 4, nor the battle with Flash has deteriorated Apple’s market capitalization, which surpassed the US$ 300 billion mark for the first time in the company's history in January 2011. Apple clearly has the first mover advantage to become the ultimate aggregator of all media for consumers… at least for now.

April 12, 2010: Palm goes up for sale

In response to another shortfall on sales expectations, Palm was put up for sale. After a short yet intense bidding war between large technology companies, HP was eventually the last man standing in the room and picked up the prize for US$ 1.2 billion.

“HP didn't buy Palm to be in the smartphone business” – HP’s CEO Mark Hurd (June 2, 2010)

With Palm in hand, HP has now a strong brand in the smartphone business, a winning technological piece of equipment and a portable operating system (WebOS) ready to be used on other devices, such as tablets. HP will bring what the company is good at, which is a strong distribution channel, a mass scale operational know-how and deep pockets to market and partner for new products. Despite Mark Hurd's announcement, HP had indeed entered the smartphone business with the Palm acquisition... and kicked off a new tablet business division at the same time.

July 22, 2010: 500 million people use Facebook

This day saw half a billion people on the planet actively using Facebook to stay connected with their friends and family. In mere seven years of existence (thefacebook.com was registered on Jan11, 2004), the site is the second most popular website in the world (first being Google.com) despite being blocked in China. All numbers are growing at an exponential rate still; 2010 saw 580 million users connecting to the site, a 65% increase year-on-year, and a market valuation at US$ 50 billion by Goldman Sachs. Nothing seems to stop Facebook, not ownership lawsuits, not privacy concerns, not breach of the government’s Data Protection Act, no environmentalists' protests and not even a movie can end the ever-growing impact of Facebook on the planet. 2011 could be the year Facebook crosses the one-billion user mark before an historical IPO.

July 25, 2010: WikiLeaks.org reveals classified government documents

On this day WikiLeaks revealed 92,201 internal and classified "Secret" records of action by the US military in Afghanistan between 2004 and 2009, the first of many such leaks, in coordination with The New York Times, The Guardian and Der Spiegel. On Oct 22, 2010, another batch of 391,832 United States Army field reports from the Iraqi War from 2004 to 2009 was released by the controversial website. Then on Nov 28, 2010, WikiLeaks published another 251,287 leaked United States embassy cables, the largest set of confidential documents ever to be released into the public domain.

Since then the spokesperson of WikiLeaks and Man of the Year voted by Times readers, Julian Assange has been arrested in UK facing extradition to Sweden over sexual assault allegations. Without a doubt WikiLeaks' actions have triggered a heated debate over the public access and use of secret information and challenged the governments’ transparency in the modern world. The leaks, by their sheer quantity and by their importance, have shaken up the foundation of journalism industry as well as global politics, and governments and large corporations are anxiously waiting for the next batch to be released, with a secret hope to not be implicated in some way. If only one day should be remembered in the technology world in 2010, WikiLeaks' very first release should be the one.

August 6, 2010: HP CEO Mark Hurd steps down

Chairman, President and CEO Mark Hurd decided with the Board of Directors to resign his positions. Hurd’s decision was made following an investigation by outside legal counsel and the General Counsel’s Office, overseen by the Board, of the facts and circumstances surrounding a claim of sexual harassment against Hurd and HP by a former contractor to HP. The investigation determined there was no violation of HP’s sexual harassment policy, but did find violations of HP’s Standards of Business Conduct. A month later Oracle announced that Hurd had joined them as President and a Board member.

HP shortly named Léo Apotheker, a former executive at SAP (Oracle's chief rival), as its new President and CEO, to replace Hurd. Perhaps angered, Oracle then tried to link Apotheker (now at HP) to a software theft by a unit of SAP within an ongoing lawsuit against SAP. SAP admitted wrongdoing, but denied that Apotheker played a role. In the end, a jury awarded Oracle US$ 1.3 billion in damages. Since the abrupt departure of Hurd, Oracle and HP have continued to fight, eroding one of the closest partnerships in Silicon Valley.

September 10, 2010: Stephen Elop becomes the new CEO of Nokia

Nokia Board of Directors appointed Stephen Elop as the President and CEO of Nokia. As the first non-Finnish CEO in Nokia’s 139-year history, the Canadian Elop was previously the head of Microsoft's Business Division and had held several senior executive tenures in various US-based public companies, such as Juniper Networks, Adobe Systems Inc. and Macromedia Inc. Nobody internal seemed more appropriate than Elop, a seasoned executive of established US tech companies, with a strong background in both networks and software, deep experience in building alliances with large corporations (such as Intel), all while nurturing a vast business partner network (such as Microsoft’s).

This was an excellent appointment for Nokia, which has the global reach but hasn't come close to gaining Apple and Android on market share, especially in the US. And although US represents just 8% of the global mobile phone market in terms of revenue and 6% in terms of users, it is still the market maker when it comes to financial markets and Nokia is not loved by investors there. If Wall Street sneezes, the world catches a cold. OPK, Nokia's previous CEO, was fired to have forgotten it. Elop, whose career was made with American companies, may fare better.

October 4, 2010: New CEOs appointed at Twitter and Skype

On Oct 4, Twitter gave its reins to its COO Dick Costolo, who replaced co-founder Evan Williams as the new CEO. The same day former Cisco Systems executive Tony Bates was hired by Skype as their new CEO. Skype and Twitter have never been more alike than that particular day when both replaced their CEO for similar reasons. Both companies have been the market leader in their respective markets, one in the VoIP space and the other in real time communication stream. Both have been victims of a similar disease: lack of revenue growth. In bringing in highly seasoned industry executives to lead the last mile before the IPO, their Boards have decided to give a final push for a likely billion-dollar cash out.

October 11, 2010: Microsoft launches Windows Phone 7

A quick history lesson: In 2006, Nokia’s Symbian was the market leader in the mobile OS industry, a 60 million-units-a-year business, in which Palm, RIM and Microsoft were only distant competitors. Then in 2007, Apple introduced the iPhone and changed the paradigm forever. Today though Symbian is still a declining market leader, Apple and Google are the only references in the smartphone business. Palm has been bought out by HP and RIM is still defending its corporate clientele. Windows disappeared from the radar screen and had to reinvent itself or die, if it wanted to compete in the smartphone business.

So on Oct 11, 2010, the Windows Phone 7 launch marked the new era of Microsoft-powered smartphones. With a solid design and a strong touch-driven interface different from its competitors, Microsoft managed to get it right in the first place. Certainly with its tremendous capital and large partner network, Microsoft is back in the smartphone business with the ambition for a 20% market share, a share that the PC version of Windows 7 OS attained within one year of launch.

December 3, 2010: Groupon says no to Google's US$ 6 billion offer

It could have been a fantastic Christmas for Brad Keywell and Eric Lefkofsky, the Groupon co-founders, but instead of accepting a historical US$ 6 billion buyout bid from Google that might have made them as much as US$ 600 million and US$ 1.8 billion respectively, they instead raised a new series of funding: at least US$ 500 million.

The hottest web phenomenon is based on a very simple idea. The site collects deals from local businesses and offers its subscribers one deal a day in their city. But before the deal can kick in, a certain minimal number of people need to buy into it. Once the deal is reached, or "tips", the local business and Groupon split the revenue in half. Since its introduction in December 2008 with just 400 subscribers, Groupon has captured over 35 millions subscribers by November 2010 and sold over 22 million coupons generating almost US$ 2 billion a year in revenue. They are generating US$ 1 million or more every week in pure profit.

Groupon, which serves mainly young, urban, educated and single women as its target segment, is now in more than 150 markets in North America and 100 markets in Europe, Asia and South America (October 2010). The Chicago-based company, with 80% global market share for group discounts, is not afraid of the 500-plus copycat competitors (100 just in China) because it addresses the perennial concern of the local small businesses with limited marketing budgets. Only Living Social, which recently received a US$ 175 million investment from Amazon, has emerged as a genuine competitor. With a unique tone (most of the staff is from the Chicago's legendary improv-comedy scene) Groupon spotlights one local business to avid shoppers once a day.

No company has managed to grow so big, so fast, ever in history. Groupon is on track to do what Google did in three years but in less than one year. Groupon has found the magic formula, and is not ready to give it away, not even to the busiest buyer of 2010, Google, and its US$ 6 billion.

In the year of economic recovery, 2010, the few winners in the technology space have been the large multinational companies with their multi-billion dollars, similar to 2009. The big corporations became bigger, acquiring more products and services, venturing into new businesses, while leaving behind their competitors. A handful of internet companies have managed their way up and cleaning the books in preparation for IPOs. NQ Logic is looking forward to seeing you in 2011.

Happy holidays to everyone.

Connecting People … with Nokia

2010-09-24T16:31:00.008+08:00

In the book of corporate history, the summer of 2010 will be remembered as a deadly summer for mobile phone CEOs. Just a few weeks apart three CEOs - LG, HP and Nokia - have been asked to leave by their respective board of directors. Of the three, perhaps Nokia's story is the most interesting.

Last Week’s Executive Musical Chair Game

After months of rumors, the Nokia Board of Directors on September 10, finally appointed Stephen Elop as the President and Chief Executive Officer of Nokia, to replace Olli-Pekka Kallasvuo. OPK, who took the job four years prior, will continue to be Chairman of the board for Nokia Siemens Networks (the joint venture between Nokia and Siemens AG).

As the first non-Finnish CEO in Nokia’s 139-year history, the Canadian Elop was previously the head of Microsoft's Business Division and had held several senior executive tenures in various US-based public companies, such as Juniper Networks, Adobe Systems Inc. and Macromedia Inc.

Three days later on September 13, Anssi Vanjoki, Nokia's EVP of the Mobile Solutions unit and long time considered as the next-in-line CEO, gave his six months’ notice. Not being selected for the top job the second time around was the main reason for his departure.

The next day on September 14, the Nokia Chairman and previous CEO, Jorma Ollila confirmed [WSJ] that he plans to step down in 2012. During his 14 years as CEO, Ollila transformed the Finnish engineering giant into the world's largest mobile phone manufacturer and one of the few non-US technology companies with a truly global footprint on handsets.

This recent executive management shuffle has not managed to curtail the fall in Nokia’s share price. Some US financial analysts have now downgraded Nokia stocks (NOK) from Hold to Sell, arguing that they are "concerned over near-term dynamics given the lack of compelling high-end solutions."

Though Nokia announced three new high-end smartphone models (C6, C7, E7) at the Nokia World 2010 conference in London, the press still focused more on the possible delay of Nokia’ iPhone competitor, the N8 (since then refuted by the Finish company). The new "Nokia is back" tagline has been lost in translation and the company has seen its share price slipping away from its best days pre-economic crisis.

Under the PR Hood, Nokia’s Reality

So if you read the press, Nokia with its entire senior management exodus, its lack of offering in the smartphone category, and its depleting single-digit market share in the US, is a company on the verge of implosion.

According to the same press coverage (US based majority), Nokia’s latest move to an external CEO is a lost attempt of a company that only sells cheap phones in the developing world, who wants to move up to the iPhone battle.

But the reality is very much different and should be placed in its proper context.

First Nokia Company's Logo

Nokia is the world leader in the mobile phone manufacturing industry with 34.2% market share [Gartner, Aug 12, 2010] selling 260,000 phones per day around the world, and manufactures close to 60 different types of phones, of which half are considered to be in the smartphone category.

Nokia employs 123,000 employees in 120 countries, and has €41 billion in sales across 150 countries and an operating profit of €1.2 billion in 2009. With €8.8 billion in cash and short-term investment and over €5 billion invested in R&D in 2010, Nokia has solid reign to be able to deliver its small incremental growth around the world. Separately, the Nokia brand itself, which is valued at $34.8 billion, is listed as the fifth most valuable global brand and first non-US company in the Interbrand/BusinessWeek Best Global Brands list of 2009.

The Finnish company is divided in three distinct business groups.

Mobile Solutions is in charge of smartphones, enterprise-class devices, internet and multimedia solutions.
Mobile Phones is responsible for Nokia's portfolio of affordable mobile phones.
Markets is in charge of sales and marketing of the company.

Nokia also has several subsidiaries, of which the three most important are the two recent acquisitions – network manufacturer from Siemens (now called Nokia Siemens Networks) and cart manufacturer Navteq – and the recently created Symbian Foundation which helps to distribute the Symbian platform royalty-free as open source.

Nokia plays a very large role in the economy of Finland and is by far the largest Finnish company, accounting for about one-third of the market capitalization of the Helsinki Stock Exchange, but the company has seen a drastic collapse of its share on the New York Stock Exchange -70% since 2007, and -40% in the last 52 weeks alone.

Nokia Share Price as OPK as a CEO (since 2006)
Source: www.bloomberg.com

Analysis of the annual income over the past eight years shows that revenues are increasing over time while profits are decreasing. Mobile phones have been commoditized.

Nokia Revenue & Profit Margin since 2002
Source: www.nokia.com

Wall Street has been sending a strong message to Nokia Board of Directors the last two years. If Nokia wants to be traded in the US, Nokia has to be visible and play a leading role in the smartphone business in the US. The mere 3.9% market share in the smartphone category compared to 51% for Research in Motion and 29.5% for Apple in North America is not acceptable [Gartner, Dec 2009].

Forecast of Mobile OS (Millions Units)
Source: www.gartner.com

Stuck between Motorola’s precedent of a mobile company that can rise and fall in a short time frame, and Apple iPhone hype, Nokia has been hammered by US investors to the point that the board was forced to change the management team to avoid a hostile take-over. Although the hefty price tag (over $U35 billion), and a strong involvement from the Finnish government will probably discourage the most perseverant acquisitors of the market (Cisco, HP, Apple, Google, Oracle, Microsoft…), speculations are still abound on Wall Street of snapping the market leader of the next device revolution for a cheap price. Nokia with its worldwide brand, strong R&D, solid distribution network around the world is the best bargain on the market today.

The Real Problems

In order to position itself as a clear winner of the trillion dollar mobile industry and establish itself as a sustainable market leader, mobile handset manufacturers have to play with a mix of new and old rules.

Telecommunications companies are still the ones who own the relationship with end users. Users are downloading and using more and more applications on their more and more intelligent phones. The OS of the future will be open source based on Linux, pushing closed systems to one end of the market (corporate and high-end segment).

The first challenge Nokia faces in the US is a Distribution Channel challenge. It is true around the world but more so in the US, where the smartphone market can be divided in three categories with each a distinct, and at times, competitive distribution channel:

The first is the corporate category (30%). Large corporations buy large amount of smartphones with predefined settings, standardized OS and configuration. The key factor in the purchase decision is the IT maintenance cost. Due to history and business relationships cultivated by account managers, only two companies are sharing the pie: RIM and Microsoft. Nokia currently does not have an appealing solution on this market segment in US.
The second category is in the subsidized phones (60%). The big four US carriers decide what phone should be on their networks and subsidize a portion of the phone in return for a two-year contract. In the late 90’s Nokia rightly decided to pursue the GSM standard (80% world and AT&T and T-Mobile USA in the US) rather than the CDMA standard (Asia, and Sprint and Verizon Wireless). Unfortunately with AT&T’s exclusive deal with Apple, Nokia is left with only T-Mobile USA, the fourth telecommunications carrier and its 34 million US customers, representing a mere 12% [comScore Mar 2010] of the total addressable market. Nokia is not visible for this market segment in US.
The third category is for the non-subsidized phone (10%). Customers walk into retail stores and buy a phone to use with pre- or post-paid contract. Usually a customer pays the actual price of the phone and the latest smartphones could easily be in the range of over U$600. This is the most competitive market to be in. With hundreds of devices from large manufacturers including Acer, Dell, HTC, Motorola, Samsung, Sony Ericsson, LG and many others, Nokia is fighting a tremendous marketing war. Even Nexus One had failed and Google had to stop selling it online just after six month in business even though it was considered as the best smartphone on the marketplace. Nokia is one brand among others in the US for this segment.

The second challenge Nokia is facing is its protracted OS Redesign, and the recent competitive innovations that set new standards and expectations in US.

In 2007 Apple introduced the iPhone and changed the mobile industry not only in terms of functionality but also in term of interface. The new multi-touch screen interface based on a more intuitive graphical design became the de facto standard for smartphones in the US. This new user interface consumed more battery power and needs more CPU horsepower than the regular smartphones out on the market. But Moore’s law helped over time to overcome these technological challenges. The iOS (iPhone OS), derived from Mac OS X, is a Unix-like operating system by nature, but is still a closed system and is kept confidential by Apple.

Also, in early 2009 and after four years of incubation, Google finally managed to release a new generation of mobile operating system based on a modified version of the Linux kernel called Android. All versions are licensed through the Open Handset Alliance, a consortium of 78 hardware, software and Telecom companies devoted to advancing open standards for mobile devices. Google released most of the Android code under the Apache License, a free software and open source license. This OS is also based on latest graphical interface and can support touch screen capability.

During that time, Nokia was transforming its proprietary Symbian OS from a fragmented, closed standard to a single, open standard version. This was a tremendous undertaking as mobile manufacturers were licensing Symbian from around the world from Nokia (Fujitsu, Mitsubishi, Sony Ericsson, Sharp etc.) and with each new mobile model, there were often upgrades to the OS. The Symbian OS, a descendant of Psion's EPOC, runs exclusively on ARM processors but is based on a microkernel and has unique constraints that limit the graphical interface capabilities altogether.

Faced with unprecedented comparison and competition from Apple’s slick iOS and Google’s free Android, Nokia decided in early 2010 to join forces and co-develop with Intel, MeeGo, an also Linux-based open source mobile OS aimed to run with both ARM and Intel x86 processors. The MeeGo architecture will allow developers to produce applications compatible across multiple platforms beyond the mobile (such as tablets, car, TV, etc…) and with graphical interface. But contrary to what Microsoft did when moving away from Windows Mobile 6.3 to Windows Mobile 7, Nokia decided that all development tools for Symbian will be harmonized with MeeGo to allow smooth migration from the Symbian OS to the MeeGo OS.

By doing so, Nokia is rightly planning to keep its Symbian partners and developers community it has built over years. Unfortunately Nokia started three years too late and should have embraced the Linux Base kernel sooner than 2010. It is now on the long road to catch-up.

The third and last challenge Nokia is facing in the US is the Software Ecosystem.

According to a recent study [Pew Internet study with Nielsen, Sep 2010] 29% of US mobile phone owners have downloaded apps to their phone and 13% have even paid to download apps. The fast adoption curve of the "apps phenomenon" in US is fascinating for a market which is just two years mature. Although mobile apps are not the main selling point for a phone purchase decision, it seems that once used, customers start addictively using apps to the point of reaching mobile data traffic saturation in certain US cities.

Following the trend of internet and software companies, mobile hardware companies have outsourced app development to third parties in return for a share of the profit (30% in the case of Apple, Nokia and Android, but 20% for RIM). Online stores and sometimes telecommunications billing and provisioning capabilities provide an ecosystem where startups can build and sell applications or games that can reach millions of customers. Costly in-house development and large acquisitions (such as Nokia’s U$8.1 billion purchase of Navtec in 2007) are passé. Having a vast ecosystem of apps and developers around the OS is not the surefire the road to success, but not having one is certainly a detriment in the smartphone battle (see Palm or Windows).

"Developers, developers, developers" [Stephen Elop, CEO of Nokia, Sep 15, 2010]

To counterattack Apple’s App Store launch in 2007, Nokia announced the creation of the Ovi ("door" in Finnish) Store. After a languished beginning, the Ovi platform that offers 13,000 apps is reaching 2 million downloads a day, onto over 120 different mobile phones in over 190 countries and in 30 different languages. According to Evans Data, Ovi Store has already overtaken Apple in high growth markets in Asia Pacific and Latin America, but is still far away from the Apple App Store’s cumulative 6.5 billion downloads and its 250,000 apps catalogue. The mobile game has changed from "hardware" to "hardware plus software", and Nokia still has a long way to attract a strong and financially viable developer community around its Ovi Store if it wants to compete in the same category as Apple and Android.

What’s Next

The promising idea that users will upgrade their mobile phone from standard to smartphone within the same brand has long faded away. Telecommunications companies’ exclusive partnerships with certain manufacturers, and certainly the introduction of the iPhone by Apple changed the game for mobile phones.

Nokia has the global breadth, but Apple and Android have the depth especially in US and that is the one market that can shift the tide of the financial markets.

Nokia’s new CEO Elop has the key priority to fix the share price. Nokia has to be back on track financially and address US investor doubts. This will be done only if Elop manages to introduce custom-made smartphones in the US market, expedite the MeeGo OS migration, and create a strong and vocal developer community. The "2010 Calling All Developers: North America" competition announced jointly by AT&T and Nokia is a first step in the right direction to make the N8 finally visible on the US market.

This will not be sufficient enough to make investors happy. Elop will certainly have more challenges ahead, such as leading a bureaucratic company with over 120,000 employees globally, defending its market share in the developing world against the cheap Asian mobile brands, and making Nokia savvier in the PR media game in the US.

Nobody internal seems more appropriate than Elop, a seasoned executive of established US tech companies, with a strong background in both networks and software, deep experience in building alliances with large corporations (such as Intel), all while nurturing a vast business partner network (such as Microsoft’s).

In the coming months, be prepared for some budget cuts, realignment in the workforce, a buy back program, spin off of non-strategic and deficient subsidiaries (i.e., Nokia Siemens Networks), and aggressive media coverage. Shareholders will love it, the employees and the Finnish government less so. But this is the price to pay if Nokia still wants to be a global, independent technology company.

Even though the US represents just 8% of the global mobile phone market in terms of revenue and 6% in term of users, it is still the market maker when it comes to financial market. If Wall Street sneezes, the world catches a cold. OPK was fired to have forgotten it.

The Pressing Pressure on the Press

2010-08-06T11:45:00.044+08:00

Last month, for the first time, the internet has surpassed newspapers as a primary way for Americans to get news.

The demise of the newspaper business has been happening steadily since the rise of the internet, but the public rapid-fire exchange between the two industries started perhaps on Nov 09, 2009 when Rupert Murdoch, Chairman and CEO of News Corp., the world's second largest media conglomerate across newspapers, magazines, TV, radio, music, suggested that his company will start charging web readers for all of their news content, and will remove that same content from showing up in search results of Google and other news aggregators [full length video].

A few days later Eric Schmidt, Chairman and CEO of Google, responded that Google sends "online news publishers a billion clicks a month from Google News" [Dec 01, 2009]. But still Google updated its First Click Free program, capping the number of free picks a web reader could do on Google News at any given day, in an effort to appease the growing insurgency of newspapers around the world against itself for allowing excerpts of subscription-based content to show up in its search results ("Hamburg Declaration on Intellectual Property Rights").

Rupert Murdoch toughened his message stating that "quality content is not free" and aggregators are free riders who capture too much from the ever-shrinking advertising revenue pie.

"Producing journalism is expensive. We invest tremendous resources in our project from technology to our salaries. To aggregate stories is not fair use. To be impolite, it is theft." — Rupert Murdoch, News Corp. Chairman and CEO [Dec 01, 2009]

And heavily encouraged by the success of Hulu, a group of five publishers (News Corp., Condé Nast, Hearst, Meredith and Time Inc.) announced plans to establish a new, open standard-based digital storefront for their content. Initially, the new service would provide subscribers digital magazine content compatible for playback on any portable devices, such as smartphones, e-readers, laptops and tablet PCs.

Independently the New York Times announced that it will also charge their frequent readers for its online content starting early 2011 [Jan 20, 2010].

It will not be the first time that this "Gray Lady" has erected a wall between her content and her 20 million unique readers a month, but the previous attempt called TimesSelect was abandoned after a two-year experiment because their top columnists behind the for-pay wall protested and also because there were many other free, viable news alternatives. During the early months of 2010, The New York Times also toyed with different user interfaces and applications such as the now defunct Living Stories, the Times Skimmer or the iPad application with various and limited results.

On the side, News Corp. has also reportedly been in talks with Microsoft’s Bing (Google's closest competitor in search) over an unlikely deal in which the Microsoft would pay News Corp. for the privilege to index and display its news content in their search results. News Corp. has also been experimenting with a pay wall requiring registration for its various news properties around the world. The Times in UK was the first to lock up its content behind a pay wall in early July 2010, registering a 90% drop in traffic.

All the while the US Federal Trade Commission (FTC) held two workshops in Dec 2009 and Mar 2010 to explore how the internet has affected journalism. The resulting 47-page document is a compilation of facts about the current state of the failing newspaper industry and a mere effort to defend the status quo [Jun 15, 2010].

"Whether you're offering your content for free or selling it, it's crucial that people find it." — Josh Cohen, Senior Business Product Manager, Google News [Dec 01, 2009]

In response to the FTC, Google released its own 20-page document [Jul 20, 2010] defending its fair use of content under the Copyright Act, its willingness to use a content licensing agreement with news publishers, and its intent to not tax its customers for online content. Google is clearly positioning itself at the center of the monetization of any content on the internet by being the de facto advertising/monetization platform for all digital information with web users.

With the introduction of Apple's iPad early this year, major media organizations such as the New York Times and Condé Nast thought that this new consumer electronic gadget could be the next frontier of digital content monetization, and developed iPad formats of their content. But these companies quickly realized that the most important relationship (the one with the customer for ad placement) was in reality fully outsourced to Apple without any compensation or alternative.

But most recently, Wikileaks.org in coordination with The New York Times, The Guardian and Der Spiegel, posted online 92,201 internal and classified "Secret" records of actions by the US military in Afghanistan between 2004 and 2009 [Jul 25, 2010].

With the goal of bringing better transparency to government activities and illuminating "unethical behavior" by governments and corporations around the world, the now Icelandic organization has attracted much spotlight in recent months. Julian Paul Assange, the man behind the Wikileaks.org has established the first online source for verified, valuable yet anonymous information. This digital "Deep Throat", with previous leaks such as the "Collateral Murder" video and the "Reykjavik13" documents about the banking crisis in Iceland earlier this year, has managed to rock the world of investigative journalism and the media.

Will Wikileaks be a lasting supplier of verified and free data for the world? Will it keep protecting anonymous source from governments and corporations? Will it put national security at risk rather than bringing about more accountability in governments? How will it handle law suits? What ethics is Wikileaks based on? Should Wikileaks code of conduct be transparent or crowd sourced? All remains to be seen in this early stage, but the dynamics of investigative journalism will certainly shift.

These different industry discussions and developments put together in the right context present an interesting picture to what the future of the news industry will be like.

The Truth in Advertising 'Numbers'

The US market, with a significant and mature press industry, shows the extreme scenarios of the industry shrinking. According to Paper Cuts, there have been over 35,000 job losses or buyouts in the US newspaper industry since March 2007. Newsrooms have simply shrunk by 25% in the last three years. And 166 US newspapers have either shut down or stopped putting out a print edition since 2008.

Advertising Revenue in the US News Industry
Source: NAA, NQLogic [2010]

The US newspaper industry experienced a severe decline in advertising revenue in 2008 (-17.7%), and saw a further decline (-27.2% drop from 2008) with a loss of U$7.5 billion in advertising revenue in 2009 alone.

For most newspapers, about 80% of revenues come from advertising and 20% from subscribers. Newspapers’ revenues from advertising have fallen approximately 45% since 2000. One example is in the print classified ads, where revenues fell from U$19.6 billion in 2000 to an estimated U$6 billion in 2009, a steep decline of 70% to competitors like Monster, Craigslist and Google.

On the other hand the number of online real estate related to news exploded in the past decade not only in terms of page consulted online but also in terms of unique visitors. Unfortunately the advertising revenue associated with online news is at a fraction of the print industry (10% on average), and has also contracted in the past two years.

Online Traffic of the US News Industry
Source: Newspaper Association of America, NQLogic [2010]

And not all online news readers are worth the same. According to the American Press Institute online visitors could be classified in three different categories The "Fly-by's" (54%) who visit once a month, the "incidental loyalists" (21%) who come 1-3 days a month and 1-2 times per day and the "core loyalists" (25%) who come 20 days per month and 2-3 times per day. The latest category represents in general 86% of all online traffic. The same survey across various online news companies in the US found that online readership is 10 times more than the printed one, corresponds to 1.3 times the local population, and has an average of 2.5 pages consulted per month.

US Online News Consumer Segmentation
Source: American Press Institute, NQLogic [2010]

Although US households spend only 5% of their information time reading newspapers, magazines and books (continuous declined in readership over the last fifty years), people are increasingly turning away from printed news but would want them to be delivered digitally, in vast amount and for free. News readers are moving away from print edition to read their favorite news online.

Sad News for the News

In a desperate move, newspapers are trying to capture as much revenue as possible from their online "core-loyalist" subscribers by building online "pay walls". Ultimately news organizations will suffer from decreased revenue from advertising (less visits and visitors) as well as subscription (customers will find free news elsewhere).

Even though newspapers could move to online-only and reduce between 50% and 75% of their costs on printing and distribution, such a move would not make economic sense today since many newspapers still receive approximately 90% of their advertising revenues from print advertising, with somewhat less than 10% coming from online advertising.

Readers on the other hand do not wish to pay for online news. Although 50% saying that they are ready to pay for news only based on a micro-payment format where they are charged for reading the news and not for the entire newspaper [Nielsen], recent experiments demonstrate a predicable dramatic drop in visits (down to 80%) of global (Newsday) or even local (Sun Chronicle) online newspaper sites with a low conversion subscription rate, and a modest conversion rate for specialists (FT or The Wall Street Journal).

"If Mr. Gutenberg had come up with the Internet instead of movable type back in the late 15th century, and for 400 years we had used the Internet for news and all types of entertainment and all kinds of everything else, and I came along one day and said "I have got this wonderful idea: we are going to chop down some trees up in Canada and ship them to a paper mill which will cost us a fortune to run through and deliver newsprint and then we’ll ship that down to some newspaper and we’ll have a whole bunch of people staying up all night writing up things and then we’ll send a bunch of kids out the next day all over town delivering this thing and we are going to really wipe out the Internet with this"… It ain’t going to happen" — Warren Buffet, [May 4, 2009]

In this classic case of distribution channel conflict, the news industry is cannibalizing its own advertising revenue. The current defensive tactics we are witnessing today will not delay the inevitable digital revolution that must occur in order to be sustainable as a business.

In a world of abundance, the demand side is always in the driving seat. Consumers have voted with their clicks that they want to see news for free online, and mainly the older baby boomer generation is nowadays willing to pay for outdated (by a night), printed news. Majority of consumers today expect news to be free, digital and in real time and they are ready to find a way to keep it that way. Suppliers have no option but to adapt or to shut.

Bright Future for the New News

Ironically consumers have never been so enthusiastic and hungry for news, and information in general around the world. News is consumed everywhere, all the time and on every possible device, whether it is a breaking news, lifestyle content or real time sports updates.

The new news industry must be built to the following consumer dynamics and needs:

With limited resources (time and money) but with unlimited choices, consumers will drive what the future of news will be. What once was a protected industry with high barriers to entry has crashed into a million newsrooms on everybody’s laptop. Through blogs, social networks, bookmarking sites, etc. news has become decentralized in consumers' minds and is now where amateurs, bloggers and even friends are competing with professionals for truth, persuasion and attention.
News of the future must be perfectly consumer-centric. They need to be personalized (dedicated to a single individual's preferences), interactive, real time, multi-format (video, audio and text), multi-devices (PC, laptop, tablet, phone…), specialized (business, technology, politics, international affairs, sports…) and unit based (per article) - tailored to the point where defection is unthinkable.
Most of the mass market news will be consumed digitally for obvious convenience and cost concerns by consumers but, some will survive in print with less frequency than today, moving slowly to weekly or monthly coverage with deeper research. Paper publishing is now deemed too slow when compared to digital publishing in our real-time society [See Twitter and the Information Velocity].
Consumers will perceive news as being of just two values, either very high when scarce and zero when a commodity. Monetization of the news will follow this principle where a vast majority of the new news organizations will be ad-supported with a lean team, and set dynamic pricing on their content. A minority of news organizations will be subscription-based on narrow and extremely specialized content.

To become successful as a business in this bright, digital world, new news organizations will likely operate in the following manners:

News organization will concentrate their activities around two major brand assets to build loyalty. The first one is around the trust between a brand and its consumers, and the second is proposing a compelling point of view that would attract a particular readership base.
Their brand (and therefore their revenue) will depend on how accurately they can decipher the truth from the noise (signal-to-noise ratio) and how effectively they elaborate the right from the wrong in their viewpoints.

The New News Industry Landscape

Source: NQLogic [2010]

The current news organizations will gravitate towards one of three brand types: [1] Buzz Brand, attracting the mass audience on hot news delivered through and influenced by social media; [2] Personal Brand, writers or independent bloggers dedicated to a particular theme and; [3] Public Brand, or news organizations where current journalism resides.
The new news industry will outsource non-core processes to reduce costs and focus more efforts on brand building and content generation. In the future, process will be separated from the content, leaving third parties to manage the manufacturing and distribution process, and the news organization to create the content. This divestment will operate not only vertically but also horizontally.
The entire newspaper production model will be decomposed into processes that can be independently optimized, reproduced and replicated over the internet. For example, Wikileaks.org has already established itself as the anonymous yet dependable source for the news industry. Other newspaper processes can be further improved and replicated (Editing, Publishing, Distribution, Measurement, etc.).

The Decomposed New News Model
Source: NQLogic [2010]

Experiments around crowd-sourced writing, editing and publishing will flourish in the next years with various success and interest depending on trust and point of view.
The current editor's role will be split. Copy editing will remain, but content and topic selecting will be overseen by tracking companies (buzz metrics), friends and/or professional experts.
New services will emerge based on how to discover new stories written by e-journalists (newspaper journalists, crow-sourced journalists, citizen journalists or avid bloggers).

3T Paradigm of the New News Industry

Once held by a small number of powerful people with public interest at heart and sometimes close connections to governments, the news industry clearly has been disrupted by the internet in the last decade.

News organizations are experiencing a shift where previous scarcity of content and suppliers is being replaced by abundance of information at near-zero marginal cost of distribution. News are becoming a dialogue between readers and providers. At the same time consumers are discovering online what they never had on print before: news they can customize as opposed to news they are forced to read.

The internet has forced news organizations to position themselves along the dimensions of the three T's: Truth, Time and Topic.

The most successful in each dimension will survive and establish a lasting brand that will capture a global market in which most news will be free (or very cheap), local, multilingual and on the device of choice. It will be their duty to then monetize their readership (not before). Only at that point will this Fourth Pillar of the Democracy achieve what it was invented for in the first place by mindkin: an independent power with a mission to enlighten people around the world about the world.

Broadband Goes Mobile

2010-04-24T14:56:00.027+08:00

While the media buzz is still digesting the iPad launch in the US, debating over the new advertising platforms from Apple and Twitter, and commenting on the exceptional 2010 Q1 results from technology companies (IBM, Apple, Microsoft and Google), the last month witnessed many dispersed yet drastic changes in the telecommunications ecosystem that could transform the entire industry and impact billions of people’s lives in a sweeping manner.

Monday, April 12 was the first day of the world's first auction for the 4G spectrum public sale, which happened to be in Germany. The auction, which is likely to last several weeks, is not expected to run as high as the previous one a decade ago (€50 billion or U$67 billion), but the strong competition among four major operators (Vodafone Group, Deutsche Telekom's T-Mobile, KPN's E-Plus and Telefonica's O2) will certainly generate a large profit for the German government (estimated at €3 to €7 billion). This world’s first auction sale of a 4G license will undoubtedly set the trend for the following European countries which are expected to launch their own auctions later this year or early next.
A day earlier at the 2010 WiMAX Forum Congress Asia hosted by Taipei, leading WiMAX vendors Alvarion, Beceem, GCT Semiconductor, Intel, Motorola, Samsung, Sequans, XRONet and Chinese handset manufacturer ZTE as well as the Taiwanese research organization ITRI, announced the launch of the WiMAX 2 Collaboration Initiative (WCI). The initiative has a unique mission to accelerate the implementation and interoperability of new WiMAX 2 systems designed to meet the IMT-Advanced (4G) standards, which requires delivering low latency, capacity for VoIP, 1Gbps access speeds to fixed locations, and 100Mbps to fast moving mobile nodes.
On March 23, at the international CTIA WIRELESS 2010 in Las Vegas, Sprint announced the first 4G phone. The HTC Evo 4G is not only the first commercially available 4G handset offered by a US carrier but also the carrier's first WiMAX cell phone. The handset, which is expected to be available during the fourth quarter of 2010, runs the latest Google Android OS 2.1, claims speeds up to ten times faster than 3G, and comes with GPS, 8.0 megapixel camera, Micro SD card slots, WiFi and a 1GHz processor, setting the American carrier as the top leader in the high-bandwidth Smartphone market.

These three announcements are corroborating the trend that Erickson revealed also on March 23, that mobile data traffic surpassed mobile voice globally in December 2009.

"This is a significant milestone with some 400 million mobile broadband subscriptions now generating more data traffic than the voice traffic from the total 4.6 billion mobile subscriptions around the world." — Hans Vestberg, Ericsson President and CEO [March 23]

To understand why a German auction, a worldwide WiMAX collaboration initiative and a new US phone would shape the future of billions of people, a quick dive into the telecommunications ecosystem is necessary to grasp the promises of the next decade.

The Telecommunications Industry Then and Now

Many years have passed since the invention of the telephone in 1876 and the creation of the first telecommunication company in 1879 (AT&T) by Alexander Graham Bell. Today the entire telecommunications sector is one of the most complex, capital-intensive and regulated; and yet a lucrative, crucial and fundamental sector in the world economy.

Telecommunications companies started initially as fixed line network operators (called PSTN line), building for over a century long large networks of analog switches and vast webs of copper cable to connect people around the globe. It was only recently that technology gave the telecommunications companies a new opportunity to create a new market. On April 3, 1973 Martin Cooper, VP at Motorola, placed the first phone call on a handheld cell phone prototype, triggering a brand new sub-industry called the mobile industry. But technology never stops improving, and during the late 90’s another network called the 'internet' surfaced and this network swept over all other networks and soon enough, Internet Service Providers (ISP) were integrated into the giant telecommunications conglomerates to become part of the service offering, alongside the PSTN fixed line, mobile and sometimes cable TV broadcasting networks.

Among the main communication networks of today -- TV, Fixed PSTN, Mobile, and Internet -- the latest has become the obvious choice for any exchange of information. The last decade saw the TV and the Voice networks slowly migrating over to IP, giving rightly the Internet its name of 'network of networks', but Mobile has been a more difficult challenge for obvious technical and business reasons.

Mobile Industry Technologies

GSM World Coverage
Source: GSM World [2009]

As a technical point of view, mobile networks today are split into three main families with many different flavors, and are usually based on where they originated from and from what industry there were emerging from (Telecommunications versus PCs):

GSM (Global System for Mobile Communications) is the most popular standard for mobile telephony systems in the world. GSM is used by over 3 billion people across 212 countries and territories, representing 80% of the global mobile market uses (The GSM Association, 2009).
IS-95 (Interim Standard 95), which represents 15% of the global market, has been originally from the US and Asia (outside Japan). The standard is more widely known under its latest release as CDMA and CDMA200 and has a long-term plan to merge with the GSM technology at the LTE (Long Term Evolution) stage.
WiMAX (Worldwide Interoperability for Microwave Access) which represents only 5% of the global market is a recent technology that provides fixed and fully mobile internet access based on a roadmap issued by the Institute of Electrical and Electronics Engineers (IEEE) of the PC sector. WiMAX has been described as 'Wi-Fi on steroids', and has gained momentum in emerging countries due to its lower cost, better functionality and powerful performance. WiMAX is becoming a true competitive solution against the LTE and could certainly pose a valid threat in the longer future of the GSM standard.

Mobile Technology Evolution
Source: NQ Logic [2010]

More advanced countries are usually using the latest technologies (called 'generation' or 'G'), which are defined in advance by the International Telecommunications Union (ITU). Today schematically only two generations out of four are in use in the world: 2G in emerging countries and 3G in mature markets.

Mobile Networks - Range vs. Speed
Source: NQ Logic [2010]

Mobile Industry Ecosystem

As a whole the worldwide telecommunications revenues accounted for U$3.85 trillion or 3% of the world GDP in 2008, and represented close to 60% of the worldwide ICT revenue (OECD countries making up more than 80% of the total revenue).

Today, out of all the digital networks the most strategic is undeniably the mobile network. With 30 million new subscriptions per month and already at 4.6 billion subscriptions, the overall global mobile revenues ballooned to U$1.1 trillion in 2009, split over mobile voice (57%), SMS (11%), MMS (3%), mobile data (9%), handset manufacturers (15%) and network infrastructure (4%).

Total Telecommunications Revenue - 2009
Source: Tomi T Ahonen [2010], NQ Logic [2010]

Mobile Data, SMS and MMS (called 'Non-Voice') are a nascent revenue source, representing only 30% of the mobile carriers' revenue mix worldwide as in 2009, but is increasingly central in the attempt to offset the declining 'Voice' use in the last few years. Although the SMS has a 90% profit margin, it has neither the potential nor the scale to compensate the monetization loss from worldwide decline in total Voice (Fixed and Mobile) use.

The Size of the Mobile Market
Source: Steve Clayton [2010]

In the last few years, consumers started to connect to the internet using their mobile device, and this trend is accelerating exponentially. Projections from Cisco are somehow impressive with the global mobile data traffic doubling every year through 2014, increasing 39 times between 2009 and 2014, with a disproportionate trend toward video (by 2014, 2/3 of the world’s mobile data traffic will be video and consumer mobile internet traffic will account for 73% of all mobile data traffic). This explosion in data traffic has been fueled by the iPhone, smartphones and other portable devices that will account for 91% of all mobile data traffic by 2014.

Global Telecommunications Revenue
Source: Informa Telecoms and Media [2008]

But not all traffics are equal under the laws of network technologies. Web browsing and video are more bandwidth-hungry than email for example. And this imbalance in traffic causes a massive challenge for network companies that opened their infrastructure to the internet and what it can offer.

Trends Driving the Evolution to LTE
Source: Alcatel-Lucent [2009]

The Real Problem is Monetization not Capacity

After a vast marketing campaign to stimulate the promising mobile data market with all-you-can-eat price plans, today top executives at AT&T, Verizon Wireless, Vodafone, Deutsche Telekom and Telefónica have all recently called on the industry to move away from flat-rate data plans and move toward a tiered-price plan to manage current capacity issues.

Pointing at the power-hungry top customers (top 3% consume 40% network capacity) and the explosion of data mobile traffic (in 12 months network has seen a +4,932% in mobile data traffic), AT&T has planned to cap all customers while investing another U$1 billion on top of the U$3 billion already invested since 2006 to improve the company's mobile broadband capabilities.

This scenario, quite similar to what the internet industry of the 90s witnessed, is in reality a mere attempt to delay the massive industry shift that is happening at the moment — migration of all the different networks over the final IP network, the internet.

"Everything over IP, IP over Everything" — Dr. Dave Wisely, head of FMC research at BT [2009]

Although telecommunications companies are expected to invest this year close to U$200 billion in capital expenditures (CAPEX) to maintain and expand their networks, this and some price plan correction will be probably sufficient to welcome the 1.7 billion additional mobile data consumers expected to join the mobile internet revolution in the next few years, but certainly not make up for the gradual loss of total Voice revenue that the industry is observing now.

The large consumer surplus generated by the technology switch is actually largely redirected to the over the top internet players, the likes of Google, Microsoft, Amazon and Facebook, which are benefiting of a new set of billion consumers using their internet applications from a new device, the mobile phone.

The persistent yet failing lobby effort against Net Neutrality by global telecommunications companies has compelled them to charge customers the same price, regardless of the type of traffic. This prevents the telecommunications companies from price discriminating towards certain services (video, P2P) and from charging more for mobile usage data than SMS or voice.

Some would argue that telecommunications companies could delay the network upgrades to the latest technology and therefore, avoid moving to an all IP network. But the new technological developments driven from the PC sector (i.e., the WiMAX alternative mentioned before) puts considerable pressure on the telecommunications industry to deliver in a very short time a cheaper, faster and more universal technology, at the risk of losing the entire business to a new entrant with WiMAX.

The PC industry and its WiMAX technology have a more ambitious goal in mind, far beyond the traditional communication sector — linking all devices around the world (M2M, RFID and Internet of Things). Thanks to a coordinated effort and enthusiastic leading companies, the entire industry is moving aggressively on the current telecommunications market of connecting people. WiMAX is proposing not only a solid telecommunication alternative in our current perspective but also a bright PC future.

In other words, telecommunications companies have no other choice than to invest significant capital in U$ billions without likely seeing the ROI on their balance sheet. Their consumers today want to use their mobile devices the same way they use their laptops/PCs. Top internet players like Facebook, Amazon, Google, are already reaping the financial benefits on the application layer and will continue to monetize on telecommunication upgrades.

Facing the Future: Made in Japan

The first commercially automated cellular network (1G) was launched in Japan by NTT in 1979. The initial network covered the full 20-million-resident, metropolitan area of Tokyo. Within five years, the NTT network was expanded to cover the whole population of Japan and became the first nationwide 1G network in the world.

Internet services were first made available on Japanese mobile phones by NTT-DoCoMo in February 1999 (i-mode), and they launched 3G services in October 2001. Today with 95% of the handsets running on 3G, Japan will phase out the previous 2G network, which will cease by 2012, making Japan the first large country in the world to be on 3G only.

Mobile Telecommunications Competitors in Japan
Source: NQ Logic [2010], Morgan Stanley [2009]

Today, the mobile web in Japan is rich, fast, stable, and simple. Users press one dedicated button on their phone to connect to the internet carrier’s landing page, or they can also type in URLs directly to get to mobile web sites, which can then be browsed by using one-key shortcuts.

Handset Market Share in Japan
Source: NQ Logic [2010], Morgan Stanley [2009]

The functionality list of a Japanese phone could easily delight any techno mobile enthusiast in the world. A quick pick at the latest product catalogue from NTT DoCoMo, KDDI and SoftBank show that a standard phone in Japan has at least a 8-megapixel camera, a front-facing secondary camera for video conferencing, a GPS, a digital TV service (OneSeg), and an electronic wallet.

Furthermore, a mobile phone is also a university professor, a gaming platform, a music system, a popular e-book reader and can also be a GPS-alarm system dedicated to children, based on their distance. Latest mobile technology evolutions have promised in the very near future to deliver in Japan only, 3D touch-screen, instant voice translation and augmented reality.

All the behind-the-scenes mobile technology developments were paid at a high cost by telecommunications companies. With the introduction of a cheaper mobile data service and a strong internal competition among the three major competitors (NTT DoCoMo, KDDI and SoftBank), Japan’s mobile industry saw a massive market value decline from U$510 billion in 2000 to U$116 billion in 2009.

At the same time, Japan’s mobile internet industry, including companies like Yahoo! Japan, Rakuten, DeNA, Mixi, Gree, have grown from U$6 billion in 2000 to U$33 billion in 2009, accounting now for 22% of total market value of the mobile internet ecosystem.

Within a decade, Japanese telecommunications companies have managed to create an entire ecosystem around their networks to deliver what consumers want. And these companies managed to reside still at the center of the ICT industry, and in 2009, collected on average U$ 425 per user on mobile internet (access, commerce, services and advertising).

Japanese telecommunications companies turned a simple communication object into a ubiquitous and universal behavior assistance device, by moving away from their walled-garden business mindset, offering billing and other technical services to their partners, and proposing to demanding consumers a vast menu of services. Today Japan is 5 to 10 years ahead of the rest of world in the mobile industry. Dedicated online commerce, a wide variety of tailor-made paid services and location-based advertising have gained significant market share in Japan over the recent years, showing to the world that a dynamic mobile internet ecosystem can be nurtured by telecommunications companies.

"In Japan, kids now grow up using mobile phones, not PCs. The future of PCs isn’t bright." — Masahiro Katayama, research group head at market survey firm IDC [2007]

What Is Next for Telecommunications?

Few developments are almost certain in light of regulations, market dynamics, and trajectory seen in a country like Japan:

More people will have mobile phones.
The mobile phone will become the most universal piece of technological equipment in the history of mankind, far ahead of PCs, TVs, or any Radio devices. Today the global mobile phone penetration is at 68% and will soon rise to 90%. Mobile phone has become the most widespread technology that the world has ever seen.

The Market at the Bottom of the Pyramid
Source: C.K. Prahalad [1995], NQ Logic [2010]
More people will use mobile data services in mature and emerging markets.
As the iPhone success showed, mature markets are already craving for mobile data service. But this explosion in mobile service will also happen in emerging countries. As phone technology keeps evolving, cost of manufacturing decreases by the law of numbers, and emerging markets overflow with cheaper and second hand phones, mobile phones are becoming more powerful, at a fraction of the cost. Rolling out 3G and internet-compatible networks in emerging countries will drastically impact people’s lives and livelihoods (a country's GDP expands by 0.6% for every 10% increase in mobile penetration). The remaining 5 billion people who never accessed the internet before will probably encounter for the first time, the network of network through a mobile phone.
Global telecommunications revenue will decrease.
With the intense internal and external competition stimulated by government or regulators in the telecommunications sector, and the seismic technology evolution (WiMAX or LTE) converging towards the IP network, telecommunications companies will see a paradox, where their consumer base increases exponentially but their total revenue decreases drastically as the Voice business line contracts over time. This revenue reduction cannot be compensated in absolute value by current service offerings or existing business lines. Telecommunications will have to seek a massive change, opening new business lines (broadcasting, services, or even banking) to re-capture the consumer surplus generated by the current shift.
Telecommunications industry will consolidate.
The consolidations that happened and is still happening in Europe and North America over the past few decades will expand to emerging countries. Large telecommunications conglomerates will start to appear around the globe making new incumbents less likely to success. With a continual decrease in ARPU (Average Revenue Per User) and increase in OPEX (Operating Expenditure) and CAPEX (Capital Expenditure), telecommunications companies will become less profitable, triggering a wave of mergers and acquisitions. Consequently telecommunications companies will become bigger in size (above 100 million subscriber club) and in value (above U$50 billion revenue club), but weaker on their balance sheets.
Telecommunications companies will become service companies.
Led by the technology capabilities and consumer demand, telecommunications companies are now being compared to what the internet has to offer (unlimited information and services at a flat price). Telecommunications companies are moving away from the commodities business to embrace the service industry with all its rules and constraints (shorter cycle, fragmented competition, high demand) while restraining the current parameters of their business (large capital requirement, and convoluted operating expenditures). Those that will not change their mindset and modus operandi will disappear, swallowed by market forces.

With the emergence of 4G technology (on both network infrastructure and devices), the consumer desire to get more information and services from mobile phones, and the influence of governments and regulators, telecommunications companies are at a fulcrum point to transform themselves rapidly from commodity corporations to service companies.

Again, this transformation will see them expanding their customer base while reducing their revenue. Ironically enough telecommunications companies are becoming more central to our lives while generating less profit. But only the ones who understand how to service their customer needs well shall survive.

Twitter and the Information Velocity

2010-03-20T17:06:00.021+08:00

Last Monday, March 15, at the South by Southwest conference (SXSW) in Austin, Texas, the CEO of Twitter, Evan Williams announced that the company planned to introduce a new service called “@anywhere” [Video].

Similar to the way Facebook Connect allows Facebook users to sign into other websites using their Facebook accounts, the new @anywhere service will allow users to connect to their Twitter accounts through third-party websites. The easily implementable JavaScript feature will also allow users to post to Twitter from other sites and to comment on each others' tweets without visiting Twitter.com. Finally it will also create a mouse-over box displaying other contextual Twitter accounts and their most recent tweets.

@anywhere Partners List,
by Twitter.com [Mar 2010]

When the service will be officially launched, the initial partners will include leading news sites and large internet companies such as Amazon, AdAge, Bing, Citysearch, Digg, eBay, The Huffington Post, Meebo, MSNBC, The New York Times, Salesforce.com, Yahoo!, and YouTube. More detailed information will be revealed at Chirp, Twitter’s official developer conference, April 14-15 in San Francisco.

This announcement followed the one from March 1st, when Twitter announced that smaller partners like Ellerdale, Collecta, Kosmix, Scoopler, Twazzup, CrowdEye, and Chainn Search will also have access to data flowing across the Twitter platform, similar to partnership deals previously signed with Yahoo!, Google, and Microsoft.

Despite the almost unanimous media frustration (underwhelmed perhaps) during and after the eagerly anticipated Williams' SXSW session due to the prior leak of a rumored advertising platform, the @anywhere platform introduction and the recent deals are nothing short of a monumental progress in the evolution of the web when placed in the right context.

Twitter & Its Ecosystem

Twitter Inc. was founded by Jack Dorsey [#jack], Biz Stone [#biz], and Evan Williams [#ev] in March 2006 as a spin-off from their company Odeo. Twitter was originally created as a microblogging service that enables users to send and read text-based messages of up to 140 characters, known as tweets (the other 20 available characters in SMS were reserved for the username). The tweets were displayed on the author's profile page and delivered to the author's subscribers, known as followers. Users could send and receive tweets via the Twitter website, Short Message Service (SMS) or external applications.

Just four years later, Twitter became one of the hottest web startups on the planet, the top words of 2009; raised U$160 million in cash, was valued at U$1 billion, became profitable in 2009, captured 55 million visits per month, signed over 54 million active users worldwide, rose to rank 12 among the most visited websites in the world, became a leading breaking news medium, and managed a traffic of 50 million tweets per day (600 tweets-per-second, or 1.5 billion tweets per month).

Tweets Per Day,
by Twitter.com [Feb 2010]

The four-digit exponential growth that the company endured over the past year was a constant challenge for the small team of now 150 employees. But a wise selection of open source software, steady use of open standards like OAuth for authentication and its constant nurture of third-party application companies helped Twitter to establish itself as the reference in the microblogging arena, protected by a vast and solid ecosystem around itself.

Twitter Ecosystem,
by Jess3 and Brian Solis [2009]

Twitter evolved over the years and the initial microblogging site has become somehow larger than what its founders envisioned in the first place. Moving away from the original personal status updates to a more immediate information sharing, Twitter has reflected the change recently on its motto question from “What are you doing?” to “What's happening?”. Recently, Twitter was redefined by its co-founder Evan Williams as “an information network that helps people understand what’s going on in the world that they care about”. He also confirmed lately that Twitter will not be sold or merged in the next two years.

In June 2009, Twitter publicly acknowledged that it would reschedule a maintenance upgrade after the US State Department asked to delay the temporary shutdown due to concerns over the service's role as a truly “unique communication medium” by the protesters in Iran. Twitter has been nothing short of a global media phenomenon and used by many in most surprising way.

Adopted by Barack Obama during his campaign [#BarakObama], by the White House [#WhiteHouse], in the classrooms, during the 2008 Mumbai attacks, by restaurants, by celebrities [Ashton Kutcher, Britney Spears or Ellen DeGeneres], by large media organizations [CNN, The New York Times, BBC], by public companies [Google, JetBlue Airways, Dell], during emergency crisis [Haiti] and even by an astronaut floating 250 miles above the Earth answering both mundane and scientific questions about living on a space station, Twitter is everywhere.

“For the first time ever, more people are finding my blog from Twitter and Facebook referrals than via Google. The total number of people coming to my blog is increasing. The percentage of people who find it via Google is declining. Significantly” — Mark Cuban, owner of the Dallas Mavericks Basketball NBA Franchise, May 15, 2009

All users are not equal on Twitter and a vast majority of them are just followers with a minimum involvement with the platform, but a small minority (less than 1%) is considered to be heavy users with multiple tweets per day, constant connection with the stream of information, and their large follower audience. These loudmouths, although popular, are not the most influential but reflect the new platform's trend that sees popular personalities and companies taking advantage of the immediacy and the emotional distance shrinkage between Tweeter users and them to build a direct relationship, fostering the media buzz around their personal or business brand.

Twitter Users & Traffic,
by NQ Logic & PearAnalytics [Aug 2009]

Originally targeting the tech-savvy business audience, the company’s user demographics has expanded its solid middle-age base (35+ yrs old) to a more young (below 35 yrs old) as well as overall affluent market segment in part due to the high adoption by global celebrities such as Ashton Kutcher, Lady Gaga, Oprah Winfrey and others.

Tweets Content,
by NQ Logic & PearAnalytics [Aug 2009]

Although recent survey showed that most of the information exchanged on Tweeter and its vast ecosystem is pointless babble (referenced as "peripheral awareness" and "social grooming" by some) and public conversational, the Twitter stream of information is growing at a pace rarely seen on the planet web.

But what is most intriguing is the fact that most of the growth has been driven by its third-party applications, forcing Twitter to be a mere receptacle of the tweet data and authentication system, and leaving the relationship management and more lucrative interaction to others companies (Google and Bing for historic search, TweetDeck and Tweetie for navigational user interface).

Twitter Ecosystem Growth,
by John Borthwick [Jan 2010]

A recent survey estimated that the traffic generated by the entire Twitter ecosystem could be as big as 3 to 5 times the traffic measured today on Twitter.com, reinforcing the unique character of openness that the Silicon Valley company has been nurturing since the inception of the service.

Internet Velocity

Twitter is everywhere, growing exponentially, capturing million of instant conversations and becoming an entry point for information exchange. It created a solid ecosystem around itself thanks to its openness, partnerships and initial strategic technology decisions and business orientations.

We are already aware that the internet itself is changing in front of our eyes. After its first decade built around the content creation and distribution, and a second decade around building connections and self promotion, the internet, once just a source of content, evolved to a social and therefore, viral information exchange. Today with Twitter and services alike, the internet is becoming an instantaneous, real-time web, based on the principle of nowness. Everything on the internet is accessible, now, and Twitter is becoming the pulse of the information network on the internet.

The real-time web, against which every web service and company is now being evaluated, has many attributes and concepts that redefine the internet as a whole.

The first and foremost idea is that the internet is moving away from content generation and its almost stable distribution-monetization platform, to a constant and multiple streams of information flow. Twitter Search and Digg Lab for information, and Facebook for social interactions have already redesigned their static user interface pages to a richer dashboard to present in real-time and dynamically what is currently happening.

Streams will be defined therefore by their direction, flow, throughput rate and velocity and not by the number of users or number of visits anymore. This paradigm shift will impact drastically the online marketing industry that will have to invent new ways of measuring and calculating monetary value for interactions.
The second concept relies on the fact that the streams are a continuous (over)flow of data that need to be [1] real-time, [2] contextual, and [3] multidirectional. By the sheer volume of content being created over the internet and its exponential increase, human attention span in the real-time world will become the bottleneck.

Even with extensive practice of shifting one’s focus from one stream to another, one can only deal with a certain amount of concurrent streams at a time. To avoid perceptual disengagement from the overload, the new real-time web services will have to firstly, become more contextual and relevant for the user (be it by popularity, trend, personal interests, or social graph), and secondly, create more engaging conversations by letting people use a multidirectional exchange at their choice.
The world of streams is a world of online viral sensations, short attention spans, unexpected trends, of extreme volatility, and immediate fame. It is also becoming a digital world of extremely short-term conversations and short-term thinking. Online real-time conversations are shorter than ever (less than 140 characters today, for now) with little room for extrapolation and argument building.

But it also requires a constant engagement of all the parties at all times. The asynchronous modus operandi that took us so long to get used to (i.e., email that is relevant and still 'live' a few days later) with is now being replaced by a constant synchronous participation. Users need to be present and always be connected to be part of the real-time conversation under the threat of virtual non-existence. New location-based services such as Twitter Geo Tagging and other multi-communicational tools such as Google Voice are good examples of the acceleration towards the real-time web's synchronous conversations.
The world of streams is a world of crowds and hordes, with all of its benefits and disadvantages. Online traffic will occur in bursts, the same way users will be overflowed by information, infrastructures will be overflowed by users. Managing both information traffic and user traffic will be the challenge of the next decade for the technologists of our world. Surely enough, cloud computing and data center farms will help address the following question: What would you do tomorrow if one million customers show up at your door step?
The world of streams is a world of open standard and open data exchange. The same way that a chain is only as strong as its weakest link, the real-time web will be as real-time as its weakest refresh. Crowds will move seamlessly from one stream to another to have the latest and most current information. In the world of nowness, closed and proprietary systems will only be the final destination or receptacle, but not be part of the real-time exchange. Closed systems will be challenged by more open ones.
The world of streams will be the detonator for rationalizing and implementing of the semantic web that many experts predict will be the next evolution of the internet. To perform at it optimum pace, the real-time web will need to exchange information as fast as possible. This will only occur the day data will be understood by machine at the speed of light and therefore will have to be rationalized, programmed and manipulated, introducing the concept of Open Data proposed by Sir Timothy John "Tim" Berners-Lee, the inventor of the presentation layer language called HTML (a.k.a. the Father of the Internet).
Finally, the world of streams does not have a business model yet. Neither Facebook, nor Twitter has a solid and sustainable business model, and only previous-generation internet companies and other venture capitalist investors are today sponsoring the creation and growth of the real-time web. But surely, when streams will be strong and steady, at a high rate and high velocity, multidirectional and with deep roots in the internet, the business savvy will invent a way to monetize streams.

Gary Hayes' Social Media Count

The previous era of the internet was mostly about investigating the past. Content (text, image or video) were published like static pages periodically before users could look for them. Later on, search engines such as Google or Bing were indexing the published content to make it accessible. Search engines would index also periodically, and the accessible web was only as fresh as its most recent indexing.

In the world of streams, everything is shifting to the present; and current tools are still limited in their capabilities to store, manage, measure, present, organize or index streams. Twitter is probably the most advanced real-time stream platform we have today.

What’s Twitter Doing in the Real-Time Web?

Twitter has been at the forefront of the online immediacy battle and in the recent months, the company has increased its capacity to lead and show the way to a possible new internet based on more instant interactions.

So let us re-evaluate Twitter's recent developments through the lens of the real-time web frameworks and assumptions above. Twitter has managed to:

Outsource to major search engines all Twitter data to be indexed and therefore searchable, thereby avoiding an expensive functionality development and a tremendous amount of CPU storage capacity.
Open their platform to third-party companies to be able to develop applications, measure and present data in a factual way that could be monetized later on if necessary.
Increase the conversation flow by partnering with large online content providers for the new @anywhere service. The @anywhere functionality on partner sites will trigger and send a Twitter conversation, increasing the volume of information flowing through the real-time platform (throughput rate) and also the traffic to partners' websites (direction). The new @anywhere service is being aimed at publishing sites and media companies, who could be a future revenue source for Twitter for traffic referral.
Refocus the platform as a storage capacity to receive tweets coming from anywhere while entering the universal login battle against Google and Facebook Connect.
Increase the signal-to-noise ratio through monitoring and indexing the search results so the presented information will be more relevant and useful for users and partners. This yields quality streams, adding more value for everyone, and Twitter will be the ultimate repository for real-time information, "fostering the open exchange of information".

"The speed at which something happens may change its essential nature, and that which moves with speed quickly comes to dominate that which is slower." – "Speed and Politics," an introduction to Dromology by Paul Virilio (1977)

Twitter has entered the real-time web before anyone. It has drastically changed the way people are communicating around the world. Simply, Twitter has forced the entire internet and all users connected to it, communicating through it, consuming from it, to be in the now.

Skype over IP

2010-03-05T11:27:00.009+08:00

In the last few months, the telecommunication industry has changed in such a way that technology historians would probably define the year 2010 as a stepping stone of the new telecommunication era. Most of the reasons have to do with one technology that has been used for over a decade but was never implemented the mobile landscape: Voice over Internet Protocol (VoIP).

VoIP Gaining Mobile Reach in Past 12 Months

In June 2009 T-Mobile, a German telecommunication company, replaced the much-criticized Skype ban with a € 9.95 usage charge instead in Germany, offering its 39 million customers the capability to do VoIP call on their mobile phone. In Dec 2009 the Spanish Telefónica acquired Jajah, the white label VoIP service in an all cash transaction for U$ 207 million. And most recently, in a hearing before a European Parliament committee [Jan 14], Ms. Neelie Kroes, who is proposed to be the new EU Commissioner for the ‘Digital Agenda’ (the policy area formerly known as ‘Information Society’), said that “blocking VoIP violated network neutrality,” raising the hope of all European mobile users to finally be able to use VoIP service.

On the other side of the Atlantic Ocean, after a long battle with the FCC, last October saw AT&T finally opening up its data network to VoIP calls, leading to Apple to allow iPhone, iPad and iPod touch developers to build applications that can make Internet calls over a 3G cellular network [Jan 29] (VoIP calls were already possible on Apple devices using WiFi connections). In March 03, a spokesman for Vodafone, the world's largest mobile operator, said that the company “has no restrictions on its customers using Skype,” but is “looking to introduce a range of tariffs to suit VoIP users and non-VoIP users to achieve a fair balance”. The recently introduced “Vonage World Mobile” VoIP international calling plan for iPhone and BlackBerry users is a perfect illustration that US telecommunication companies are now taking VoIP customers’ demands seriously.

Skype, meanwhile, has been recently moving aggressively in many directions.

In a partnership with TV manufacturers Panasonic, LG [Jan 05] and Samsung [Mar 02], Skype is now offering video telephone call on HDTV (High Definition TV). Using the TV remote controls, consumers can create Skype accounts, log into their existing accounts and call traditional landlines and mobile phones as well as regular Skype users via the on-screen interface of the HDTV.

Avaya, which officially closed the U$ 475 million deal for the acquisition of Nortel's Enterprise assets nearly six months after making its first public bid [Dec 18], confirmed that the company is in "talks" with Skype now that they share the same private equity owner, Silver Lake.

On the mobile device front, Skype has been implementing its new strategy. Pulling out of the Windows Mobile platform due to performance issues across an ever-increasing Windows product offering [Feb 25], Skype has decided to launch instead an iPhone application [Jan 16]. At present, Skype is still waiting for Apple to clarify when the new terms of service will go into effect for current iPhone users [Dec 28] to deploy “very soon” a new software version that take full advantage of 3G network capabilities. Finally two days ago [Mar 03] Skype announced that a new application is available for all Symbian mobile phones (read Nokia and Sony Eriksson), giving the over 200 million smartphone users the ability to do WiFi and 3G calls all over the world.

But the most exciting, game-changing news came on February 17, when the US-based Verizon Wireless, a joint venture between Verizon Communications Inc. and Vodafone Group Plc, in an attempt to compete with AT&T, said it will launch a Skype application in March on Blackberry and Android mobile phones that enables VoIP calls for those among their 91 million customers with a voice and data plan. The rumored 2-year exclusive deal (even limited) is an important step forward for Skype and also illustrates the recent shift in approach of the telecommunication companies toward Skype.

Skypephone

Verizon is now the second company embracing the Mobile VoIP revolution after the British telecommunication company 3, which already offers Skype for free in Britain, Ireland, Austria, Denmark, Italy and Sweden, and claims to have 40% market share of mobile broadband traffic in those countries with the help of their dedicated co-branded Skypephone. In UK, the free Skype service was launched in May 2009, and 3 says that users on its network make 3 million minutes of calls every day in the UK. Skype has now reached the 1 billion call milestone on 3's mobile network in the UK.

What is Skype Really?

Skype is a company that develops a software that allows users to make calls over the Internet to other Skype users for free, or to traditional landlines telephones and mobile phones for a nominal fee. Skype's software also offers additional features such as instant messaging, file transfer and notably, video conferencing.

The company was established around the former Kaazaa team, based on the same idea that Peer-to-Peer networking will lead the future of the Internet, and released its first public beta application in August 2003. Encouraged by an exponential user growth and a prominently disruptive business model, eBay acquired the company for U$ 2.6 billion [Oct 14, 2005]. At the time of the acquisition, Skype had been downloaded more than 182 million times in 225 countries and territories. 59 million people were registered, with more than 3 million people using Skype simultaneously at any one time. The company was flagged as one of the few success stories coming from Europe.

Despite a messy legal battle with Skype’s founders and political disagreements with eBay, the Luxembourg-based and Latvian-developed software company kept growing its user base and increasing its revenue, reaching in Q3 2009, 521 million users and U$185 million in revenue. But eBay finally agreed to sell 70% of its Skype shares to an investor group led by private equity Silver Lake, original Skype founders Janus Friis, Niklas Zennstrom and Skype's intellectual property owner Joltid Limited, Canada Pension Plan Investment Board and VC’s Andreessen Horowitz [Nov 19, 2009], receiving in exchange approximately U$ 1.9 billion in cash and a note from the buyer in the principal amount of U$ 125 million.

Skype's Growth

The recently independent company has lately revamped its entire executive team, naming

Miles Flint as Chairman - former Sony Ericsson Mobile Communications AB President from 2004 to 2007 [Jan 13];
David Gurle as VP of its Business division - former Thomson Reuters Corp. executive [Jan 12];
Adrian T. Dillon as the new Chief Financial and Administration Officer - former Agilent EVP, Finance and Administration and CFO [Mar 03];
Daniel Berg as CTO - former CTO for Sun's Global Sales and Services Division and VP of Systems Engineering for Sun's Emerging Markets Region, and
Christopher S. Dean as Chief Strategy Officer - former co-founder of Texada Capital, an investment management firm [Dec 10, 2009].

All these announcements followed the appointment of former executive from Shopping.com, another eBay company, Josh Silverman as CEO in 2008 [Feb 28].

Thanks to its proprietary protocol on a VoIP technology, Skype has been profitable since 2006 and has reinvested most of its revenue from interconnecting to the PSTN network to develop an appealing product. The seven-year-old company with more than 520 million users is the “largest provider of cross-border communications in the world, by far”, accounting for 12% of cross-border voice traffic around the world [Telegeography], and is well on schedule to generate its targeted U$1 billion in sales in 2011.

Why is Skype Popular?

Last year saw Skype servicing 100 billion minutes across the Internet with 33% of these minutes being complemented by video signal. At peak times (Christmas, New Year's or Mother's Day), video on Skype goes well above 50%. Last year, Skype was also accountable for 54 billion of the 406 billion (12%) total international voice minutes [Telegeography].

All these minutes were generated by the 520 million users that live in 225 countries, from Developed-to-Emerging countries (and to a lesser extent from Developed-to-Developed countries) and moving away from fixed line to mobile connection points. Whereas telecommunication companies are focusing generally on the top 30 and most profitable inter-country highways (called “corridors”) Skype is serving all the possible 40,000 corridors with the same ease and at a minimal cost, expanding the market by servicing the unexploited long tail.

Whereas the average Facebook contact list is flying high at 130 friends, the average contact list on Skype is in a single digit number. Skype users are stating that it is quite a difficult decision to add a new contact to their list because this means that they really want to talk to that person, thereby the setting the membership value extremely high, over that of the number one social network in the world.

Essentially targeted at Long Distance business, the most expensive call from a billing standpoint, telecommunication companies did not want to have a competitor in their backyard. But with a slow growth in volume (+4% over the past five to six years), and a declining retail price (-7%), International Long Distance represents today less than 2% of the total revenue of the telecommunication companies and keep declining steadily, minimizing therefore the impact of Skype as a business threat.

Skype has formed a different value proposition to its users: a free or marginal communication solution within a rich and intimate environment. It is important to note that most of those communications would not have happened in the first place otherwise.

Skype in the New Telecommunication Paradigm

Among the four main communication networks -- TV, Voice, Mobile, and Internet -- the latest has become the obvious choice for any exchange of digital information. Today all networks are migrating over IP, giving rightly the Internet its name of network of networks. But telecommunication service providers are still fighting to protect their core business while trying to adapt to the challenging task of maintaining a costly infrastructure.

Communications Over IP

Over the past decade, telecommunication companies have been migrating piece by piece their Voice network over to the Internet. This migration is well under its way, giving the opportunity to telecommunication companies to offer fixed line unlimited plan to local and over 40 different country destinations.

Additionally the mobile explosion, shifting more towards smartphones and fueled by the iPhone, and the ever increasing urban population migration, have made the switch from the Mobile network to Internet more difficult. The consensus among major telecommunication companies to switch over 3G-LTE (or sometime WiMax) will help resolve the bandwidth congestion while minimizing the operating expenses in relatively acceptable timeline, but still at an expensive cost for consumers around the world.

"People want to take their Skype conversations with them wherever they go, whether it’s on a PC, TV or increasingly mobile phones." — Josh Silverman, Skype’s CEO [Feb 16, 2010]

Skype made its name by initially serving the untapped International Long Distance (ILD) communication market, leveraging the PC as a communication device for consumers.

Today, by extending its strategy to new devices (TV and Mobile) the company is following the consumer trend: migrating from multiple, fixed and dedicated lines of communication to an all you-can-eat wireless content consumerism.

The battle between the Device, Pipes and Content providers has moved recently towards the application layer on the device platform. With a solid balance sheet, regulators' ears, an independent board and a strong executive team, Skype is now well prepared to take by storm their next Mobile over IP business challenge, and fight head-to-head with Google and its Google Voice offering in the consumer market space.

But this will not be the only battle that Skype will take on this coming year. By offering a new version of Skype for SIP and another for Asterix, the company is now positioning itself in the SME business and is embracing a more open and globally accepted protocol, leading the way for a future ecosystem development mimicking the ones of iPhone or Facebook.

With the help of its owners and potentially a new ally in the name of Avaya, Skype will then be able to tap into the Business market and will eventually propose to the low-end business sector an all communication service offering that could be seen as a potential rival of the major players that are Cisco, IBM, Siemens and Microsoft in the Unified Communications sector.

If it manages to stay independent until its probable IPO, Skype could arguably become a major player in the new Internet Communication sector in both the consumer and business market segments, feeding services that could make the transition from multiple connections and convoluted bills across multiple networks, to the single flat-fee and unlimited data communication line over the Internet -- what everybody is already dreaming of.

Google vs. China

2010-02-19T16:35:00.010+08:00

It all started with a blog entry written by David Drummond, (SVP, Corporate Development and Chief Legal Officer) on January 12 warning that Google and others large companies from the internet, finance, technology, media and chemical sectors have been recent victims of highly sophisticated and targeted cyber attacks. Google itself was targeted by hackers with the goal of obtaining information from Chinese human rights activists’ Gmail accounts.

Contextualizing these attacks under the broader umbrella of freedom of speech, Google decided that they will provide an unfiltered Chinese search results in response to the attack, acknowledging the consequences and contemplating "having to shut down Google.cn, and potentially [their] offices in China". Defending their cloud computing technology model, Google has decided instead to denounce publicly the confirmed China-based cyber-attacks, stating their stance, and moving the debate over values and human rights onto the far larger political stage instead.

Largely applauded by Western activist associations as "a bold and difficult step for Internet freedom in support of fundamental human rights" [Leslie Harris, president of the Center for Democracy & Technology], Google was backed in their fight by not only U.S. President Barack Obama who is "a big supporter of non-censorship", but also by Secretary of State Hillary Clinton who "looks to the Chinese government for an explanation". Clinton later on in a longer political speech about Internet Freedom reaffirmed that "censorship should not be in any way accepted by any company from anywhere", and that "consumers want to have confidence that the internet companies will act as responsible stewards of their own personal information" (exact same words that appeared few days later on the Google Official Blog).

More recently Google has decided to delay the introduction of two mobile phones in China, the world's largest mobile phone market with more than 700 million accounts, widening the gap even more with the Chinese authorities. Local media reported that some Google employees from the Chinese operation center were put on leave, while some staffs were denied access and others transferred to different offices in the Asia Pacific region. Most recently the attacks have been traced back to computers at two educational institutions in China, including one with close ties to the Chinese military, and Google close competitor Baidu.

Jiang Yu, a spokesperson for China's Ministry of Foreign Affairs responded that China "welcomes international Internet companies to do business in China in accordance with the law" and that "the Chinese government administers the Internet according to law and [China has] explicit stipulations over what content can be spread on the Internet". If the battle over the internet is forceful among the Chinese internet users between the pro-Google ("It’s not Google that’s withdrawing from China, it’s China that’s withdrawing from the world") and the anti-Google ("China doesn’t care"), the government is rather quieter on providing an official respond yet.

Google in China

When in February 2006 Google decided to open its Chinese operations and offer most of its services to the fastest growing internet market in the world, the Silicon Valley company made it clear that the company would stay there under certain conditions: disclosure to user when search was filtered, user privacy was protected and google.com was available. With these in mind, Google was entering the Chinese market with the intention of gaining sufficient market share by offering a superior technology and to ideally change later on, from within, the censorship concerns.

To justify the ideological leap between their own "Don’t be evil" mantra and Chinese censorship, Google executives at the time mentioned that their focus would be to help Chinese people first and foremost.

"We actually did an evil scale and decided not to serve at all was worse evil." – Google CEO Eric Schmidt on the company’s decision to offer a censored version of its search services in China, Jan. 30, 2006

In the year 2009, with the constant alterations of all Google services (YouTube, Google.com, Books, Gmail, Google Apps and Google Docs), China made it clear that Google should not expect a rational business environment in which to work. Despite the fact that Google managed to capture between 20% to 30% of the Chinese search engine market and shaping the market around a duopoly, the company is still a distant second to Baidu, a Chinese company that enjoys a close relationship with the government and its 60% to 80% of the search engine market share.

Google’s revenue in China, which is estimated to be anywhere from U$100 million to U$600 million out of a U$1 billion total estimated search engine market, represents a tiny fraction of Google’s entire revenue (less than 2%). But Google’s China revenue has been increasing steadily over the past few years, gaining traction with the more educated internet crowd, the business people and the expat communities.

More importantly Google is really focusing on the 600 million Chinese phone subscribers. Only a small fraction of these subscribers have access to the mobile internet today, but the market for smartphones in China is exploding, fueled by China Mobile and China Unicom 3G network expansions. With its recent acquisition of AdMob and the Android OS, Google has a unique and strong position in the mobile advertising business in which Baidu and Google both have about 26% of the mobile search engine market, estimated to be U$150 million in 2009.

The Internet Market in China

According to the China Internet Network Information Center (CINIC), the Chinese population of internet users reached 384 million at the end of 2009, putting it ahead of the United States as the world’s biggest internet country. One in five internet users in the world is living in China. Mandarin is the second most used language on the internet universe, behind English and its 478 million users around the world.

In 2009, the number of Chinese internet users grew by 86 million (29 % increase from 2008), and with 29% of China's 1.3 billion population online, the middle empire has still a lot of room to grow over the next few years. With 70% of its online population below 30 years old, the internet in China is a phenomenon dedicated to young, educated and urban individuals. It is not surprising that the top three online destinations are music sites (83.5%), news portals (80.1%) and search engines (73.3%). Access through mobile phones has risen by 120 million to in total 233 million, which represents approximately 61% of all internet users.

With such a large population of internet users and a production of over 600,000 engineers per year, China is becoming a place where hacking is now an unofficial full-time profession. Essentially targeted at collecting information from competitors and across borders, Chinese cyber attacks are becoming more sophisticated and skillfully executed. Attack on Google is one among many. Computer hacking is illegal in China. Even though last year Beijing introduced a law that makes hacking a crime with punishments up to seven years in prison, the law is very difficult to enforce just by the nature of the crime.

More than sixty internet regulations have been made by the Chinese government to regulate the internet. The Golden Shield Project, sometimes known outside of China as the Great Firewall of China, prevents Chinese internet users from accessing a list of sensitive websites outside the mainland borders. Chinese internet police, estimated to be more than 30,000 heads, is vigorously monitoring critical comments on BBS, forums, blogs, and major portals. Last June the government attempted to install "Green Dam" censorship software in every new computer. This software would deny access to sites with pornographic or politically sensitive content. The plan was postponed at the last minute after a backlash by Chinese internet users, computer makers and foreign governments, but will certainly be resumed by the Beijing authorities at a later time.

The internet in China is burgeoning on both the supply and the demand sides; there is a vast catalogue of English copycat websites translated in Mandarin and at the same time, the government closely controls not only what people have access to, but also what people are commenting on. It is in this peculiar context that every internet company there, Chinese or foreign, is evolving and competing for a slice of the next biggest internet market of today.

Other U.S. Tech Companies in China

All foreign internet companies in China have the same treatment as the domestic ones and are closely monitored by the Chinese government, but they also have been place under a lot of scrutinizes in their own countries by both government and consumers.

When in 2002, Yahoo! turned over the democratic activist Wang Xiaoning’s emails, the company was under severe pressure by Congress and the American press. After Mr. Wang was sentenced to ten years in prison, his wife sued Yahoo! under human rights laws in federal court in San Francisco. Since 2005, Yahoo! China is run by Alibaba, a Chinese internet company in which Yahoo! owns a 40% stake. When testifying before Congress in another dissident case in 2006, Michael Callahan (Yahoo!'s general counsel), explained that he could not even say how often Yahoo! provides information about its users to the authorities since the authorities are dealing directly with Alibaba and not Yahoo! China anymore, thus outsourcing not only operation but responsibilities as well. Nevertheless, a new level of tension between those two companies was reached recently when "Alibaba Group has communicated to Yahoo! that Yahoo!’s statement that it is ‘aligned’ with the position Google took was reckless, given the lack of facts in evidence," and pointing out that "Alibaba doesn’t share this view".

Apple has a different approach in China. Most of its manufacturing is done there where over 200,000 contractors (through Foxconn Electronics) are assembling almost all of Apple’s products, including the recently announced iPad. But the company has decided to not focus on the Chinese market where counterfeit iPhones, the prohibition of WiFi, the fear of downloading applications and the lack of credit card usage are major obstacles to the high-end Apple customer experience and business model. Despite being taxed at 17%, since the Chinese government considers Apple a foreign manufacturer even though all of their products are built in mainland China, the company has already sold 200,000 iPhone units in partnership with China Unicom. In 2008 a large public campaign against poor working conditions in Apple’s factories in China took the company by surprise and damaged the iconic brand image in the West. Even though Apple has since introduced a new regulation and monitoring procedures, doubts are still lingering.

Microsoft owns the desktop market in China, yet earns little money from it because 80% is illegally copied. Nonetheless, Microsoft is injecting millions of dollars in aid into China, on top of its annual operating expenses to help develop infrastructure for the software industry via joint ventures, academic research center and training facilities. Disassociating itself from Google, Microsoft has reportedly said that it has no plans to pull its operations out of China and that censorship is part of everyday business in the ICT business globally. "The U.S. is the most extreme when it comes to free speech," said Steve Ballmer, noting however that even the U.S. bans child pornography, while France bans internet access to Nazi pictures, refocusing Google’s challenges to a mere business decision rather than an ethical compromise.

"On a business level, that decision to censor... was a net negative" Sergey Brin, Google co-founder [27 Jan 2007]

Afraid to be turned into a Danone Case, many foreign companies are witnessing that their previous partners are changing into ambitious predators, and that their own expertise and technology is "coming back at them globally in the form of cut-price products from subsidized state-owned behemoths" to which GNI would have a hard time to propose a solution.

CasB (China as a Business)

The unique Chinese market is defined along the below four major characteristics:

Structural: The Chinese government does not allow direct foreign investment, but rather permits joint venture partnerships when a majority ownership is held by the Chinese company. This business practice helps to retain capital gain and investment within mainland China, but also favors technology skills and savoir faire transfer while keeping economic and job growth inside the country. The recent ban from investment in China's online game operations through setting up wholly owned enterprises, joint ventures and cooperatives is the latest example of a tightening potential foreign gain in the Chinese market.

Technical: Over the past 10 years the state-driven telecommunications industry has built sufficient network capacity to create a self-sufficient ecosystem around a Chinese private internet where supply and demand are locally driven by government incentives. With hundreds of thousands of engineers manufacturing all the devices and equipment for the rest of the world, China is not lacking any capacity and competence any time soon. The recent rumors, confirmed by Rod Beckstrom (ICANN CEO), who accuses China (and Russia) of developing alternative internet roots to separate from the rest of the internet, is an eloquent example of how China is technically advanced in applying its goal of building the ultimate Great Firewall.

Political: The multi-tiered Chinese government has also built sufficient technical capabilities to be able to monitor first, and control second, all conversations on the internet. China’s Golden Shield, developed with the help of Western corporations like Cisco, Siemens-Nokia and Nortel, is a virtualization of the political behavior that exist in mainland China where control and order have brought economic growth over the past 30 years. Censorship has been the Chinese way to keep "harmony" in the middle empire for decades. The government leaders are afraid that it could set a dangerous political precedent should they compromise on Google’s request, and will not therefore take the risk to loosen their tight control over the information flow.

Cultural: Chinese business behavior is essentially driven from relationships, local Chinese preferences, harmony built over time (as opposed to disruptive) and respect of public reputation ("losing face"). Any private or public misbehavior is severely punished with social rejection at least and annihilation at most. The way Google handled the crisis is breaking each and every cultural norms with an almost a certainty of not turning back. By threatening publicly and not using back channels for influence and communication, Google did not leave any room for negotiations or for the government to not lose face, with the only choice for them to reject this Google menace.

What’s Next?

Google is executing its exit strategy, leading the way to a new type of moral behavior when it comes to foreign businesses in China. Neither China nor Google can find a satisfying compromise that will allow both of them to manage their home reputations.

"We continue to follow their laws; we continue to offer censored results. But in a reasonably short time from now we will be making some changes there." Eric Shcmidt, Google CEO [25 Jan 2010]

Google’s business model is based on encouraging consumers everywhere to exchange personal data and store private information into the cloud, in return for some online advertising. This relationship is based on the fact that consumers entrust Google with their personal data. Any private data threat (like the cyber attack that happened to Google) is not an attack on consumers’ data but on Google’s business model itself, which is intolerable and unacceptable from the company’s standpoint.

To protect their current market and to avoid a meltdown of their cash-cow business, Google had to take a major step by withdrawing from an overexposed market like China. Unless the Chinese government can guarantee that Google would not be attacked again, Google will move out of China. At the same time the Chinese government cannot allow Google to be different from any other companies without creating a risky precedence that could impact their political stability.

Clearly Google will leave China, and will try to address the Chinese market from outside using different tools, and will be eventually blocked. Chinese internet companies will pick up the remaining market share. Chinese government will be strengthened from this episode. Google will ultimately turn this security breach into an ethical business dilemma, reinforcing its already-strong corporate brand perception around the world. Cyber attacks will continue in the world of internet. And with Google’s disclosure, other U.S. technology companies will have a harder time to explain why they are still doing business in China.

The true negative impact is that the growing Chinese internet community will be more isolated from the world, which is what Google came to change in the first place.

iPad, or Apple’s Connected Consumer Strategy

2010-01-29T00:01:00.002+08:00

On Wednesday, January 27, at the Yerba Buena Center for the Arts in San Francisco, Apple revealed the latest product from its collection of consumer electronic devices [Video]. Qualified by Steve Jobs himself as the "most important thing [he has] ever done," expectations were quite high for a company that has been considered by many has a market leader in consumer electronics.

For once, the frenzy was fueled by the company executives themselves on various occasions. Apple’s official and consistent reputation for never talking about unreleased products was broken during the quarterly revenue announcement on Monday, January 25. This is quite unusual for the most secretive company of the Silicon Valley, which generally manages product launch hype through controlled leaks.

" Is There Room for a Third Category of Device in the Middle? "
[Steve Jobs, Jan 27, 2010]

Apparently Yes. The iPad is a 9.7-inch (diagonal), LED-backlit, sleek, widescreen Multi-Touch display with IPS technology. The new product weighs 1.5 pounds (0.68 Kg), has Wifi and Bluetooth technology built in with optional 3G connectors. The 9.56 inches (24.28 cm) by 7.47 inches (18.97 cm) device supports a 1024-by-768-pixel resolution screen. Powered by a new proprietary processor called A4 (certainly built by PA Semi which was purchased by Apple for U$278m in April 2008), the Apple’s gadget with its 10 hours of battery life, 16-64GB of Flash memory storage and starting price at U$499 is on par with current major competitors in the market.

The tablet is running the new, yet-to-be released iPhone OS 3.2 and is coming with iWorks, photos, videos, music, emails and Internet browsing applications; App Store and iTunes compatibilities and a new iBooks store for buying and reading eBooks.

AT&T will be offering for the American market a 250MB data plan for U$14.99/month, or unlimited data for U$30/month, without an annual contract, giving nationwide access to all their Wifi hotspots for free. Most international connectivity plan offering will be in place around the time of shipping, in April-June 2010.

Apple highlighted during the presentation that the New York Times has designed a new application for the iPad; that Electronic Arts and Gameloft have also already ported some video games to the tablet and that five major publishing companies have already signed a deal with Apple to give access to their catalogue: Pearson’s Penguin Group, News Corp.’s HarperCollins, Hachette Book Group, CBS’s Simon & Schuster and McGraw-Hill’s Macmillian. All eBooks will take full advantage of the official EPUB standard from the International Digital Publishing Forum (IDPF).

Some commentators are already pointing out the missing components that would have made the tablet a truly revolutionary all-in-one device. But even without a camera, a handwriting recognition software, Flash support, few USB ports or a controversial name, the iPad is already a well designed and interesting content consumer device, at least on video.

Remember Newton

This is not the first time that Apple (along with AT&T) tried to launch a device in the middle market, (between the phone and the computer). In 1983, Apple and AT&T already teamed up to work on a touch screen device and asked Frog Design to prototype it. Steve Jobs was Apple’s creative director at the time. The "bashful" (named after the Dwarf in Snow White story-book) was a tablet computer prototype developed in various versions, one including an attachable keyboard and a stylus, one with a floppy disk drive and handles for limited portability, and another one with an attached phone (sound familiar?). Greatly influenced by Jef Raskin and his "information appliance" concept, Steve Jobs decided to create a radically different kind of computer, one that was designed from the start to be easy to use.

A few years later in 1989, Apple concentrated some of its development forces to create a line of Personal Digital Assistant (PDA). The idea behind the PDA's Newton hardware and software platform was to create an electronic gadget that could recognize your handwriting, act as your diary and offer very basic computer applications. Ultimately most MessagePad devices released from this Newton platform were pre-loaded with proprietary software (Notes, Names, and Dates) to manage personal data and organize information.

Unfortunately during its almost ten years of existence, Newton was a compilation of hardware failure, software inaccuracies, and slipped shipping dates. Bad press, awful market penetration and a too-high price point surely lead to the end of its production in February 1998, killed by the returning CEO... Steve Jobs himself. Newton was spun off into an Apple subsidiary company, Newton Inc., and reabsorbed several months later when Steve Jobs fully resumed control of Apple. It could be interesting to note that two ex-Apple Newton developers founded Pixo, the company that later created the original iPod’s Operating Software.

In 2005 FingerWorks, a gesture recognition company, was acquired by Apple. The company produced a line of multi-touch products including the iGesture pad and the TouchStream keyboard, whose technology has been re-used since then in the latest version of the iPhone. Over the recent years numerous rumors mentioned that Apple was really close to offer the long-awaited tablet computer, but nothing materialized until this week.

Not the Only Tablet Company Out There

Tablets have been around in various forms for two decades now, and Apple was not the only company working on the tablet concept. Palm Pilot and Microsoft were at the forefront of the innovation curve on this particular product line.

Tablet is "a PC that is virtually without limits and within five years I predict it will be the most popular form of PC sold in America" – Bill Gates, ex-Microsoft's CEO [Apr 21, 2006]

Unfortunately, Microsoft Windows tablets were not a commercial success, and only found its niche with health care and insurance practices. In reality the device never took off because consumers didn't see any advantage of using an expensive replica of their laptop, simply to use a finger or a stylus as an input mechanism.

But still, manufacturing companies such as Sony [VAIO Tablet PC], HP [Pavilion TX2500Z], Lenovo [ThinkPad X200 Tablet], ASUS [Eee PC T91], Dell [Latitude XT2], Wacom [DTZ Series], Samsung [Q1UP-V], Fujitsu [LifeBook T5010 Tablet PC], Toshiba [Portege M750], and Panasonic [Toughbook T8] have offered many different versions of the tablet PC over the years based on a modified version of the Windows OS. The user interface was merely migrated over from the Windows PC world to tablet computers.

Today the tablet computers are a niche product, sold mostly to industrial and commercial buyers. They account for less than 1% of notebook PCs sold worldwide annually, or 1.3 million out of 140 million [Gartner]. But Apple is a different company altogether and can navigate where so many have failed before, finally providing the ultimate device to all Americans who spend 11.8 hours per day on average receiving information at home [UC San Diego's Global Information Industry Center].

Apple the Company

It would be difficult to tell the story of Apple without mentioning Steve Jobs at one point. Today Apple is much more working for Steve Jobs, than Steve Jobs is working at Apple. Since his return in 1997, Steve has managed to turn around an engineering company into a business empire, moving from a high-end product company to a high-end customer experience design and service company.

At the time of his return, the company had captured U$7 bn in revenue and was losing U$1 bn. The company was worth about U$4 bn, and competitors like Dell and HP were worth about U$8 bn and U$62 bn respectively. The last financial year 2009 saw Apple capturing U$36.5 bn with a net profit of U$8 bn. The company is worth more today (U$182 bn) than HP (U$118 bn) and Dell (U$27 bn) combined together.

The Fortune magazine's CEO of the Decade has managed over the past 10 years to re-center a troubled company around the idea of the "digital lifestyle" strategy. Along the way, Steve changed, besides Apple's original market play (the computing business), three other markets: the music business, the movie industry and the telecommunications business.

The most recent "all-time highest revenue and profit" quarterly release is a perfect example of what a device technology company can achieve with a marketing guru at its reigns. Over the past 33 quarters (since Q1 2002) Apple sold 50m Macintoshes, 250m iPods and 42m iPhones (which is the equivalent to what Nokia sells in a month), accumulating U$160 bn in revenue. The 283 Apple stores around the world saw 50m visitors in the past quater. iPhone owners downloaded 3 bn applications in the past 18 months and over 12 bn downloads were done through the iTunes software in the last eight years. With U$39.8 bn in cash and short-term investments on its balance sheet, and a single digit market share outside MP3 players and SmartPhones (with plenty of growth), the company is ready to tackle any market it wishes to venture into.

iPad Market Outcome

It is quite astonishing to witness Apple entering another overcrowded device market, and the skeptics of this world have sufficient ammunition to propagate their rightful doubts around the planet internet about the feasibility of this latest tablet venture.

On the other hand, some more optimistic analysts predict that with the accurate service offering and the low price point, the Apple tablet could easily capture U$3 bn in its first year of launch, pointing at the competitors who are rushing today to get out on the market their own production [PlaysForSure players, the Zune, the LG Prada, and the Palm Pre].

For sure, if there is one company who can succeed in such a market that would be Apple, because the company [1] did already successfully capture the majority in an already crowded MP3 player market after a very late entry; [2] has enough brand appeal (if not brand lust) with consumers for another success story after the iPod and iPhone; and [3] has enough cash on its balance sheet to market any product, anytime, anywhere to anyone.

Only time will tell if Apple has managed to crack the middle device paradigm, and even if they did not at their first attempt, you can be sure that the Silicon Valley company will correct the trajectory soon enough to become a dominant market player, if consumers would want another electronic device in their lives. But the truth resides somewhere else.

Apple’s New Digital Strategy

What Apple is doing is not merely launching a tablet device, but is finishing its digital strategy execution that started 10 years before, which is to connect high quality digital contents and experiences to Apple devices only, becoming the ultimate middleman between the media cloud and Apple consumers.

In its early attempt in 2001, Apple managed to create a direct experience with consumers in giving them a unique music paradigm through the iPod device, with which fans could store high quality songs accessible through an easy-to-use, secure and economically priced iTunes. With the iTunes software, Apple helped music labels to understand what the digital music retail potential could be, and to realize the limitation of DRM encryption to restrict piracy.

In 2007, the second attempt was with AppleTV, with which the company managed to distribute high-definition digital movies and TV shows to consumers' TV through a single equipment, finally converting Hollywood to digital world in people's homes. Consumers purchased the movies and TV shows via iTunes, where iTunes could be their single point of media acquisition.

The same year, the third attempt was done with the iPhone, with which Apple managed to align large telecommunications companies around the world to offer an appealing service plan, and offered a great user experience and functionality, switching many consumers to mobile data connectivity.

In 2008, the fourth attempt was with the iPhone Application Platform, with which the company was the first to open the application platform for the mobile industry, following the successful open application platform by Facebook for social networks. This gave a place for developers to build and sell their own applications to the iPhone users.

With the launch of the iPad, Apple is not going after the device market itself, but rather the missing content that has not been captured so far by the company: Books, Games, and soon Newspapers.

Apple is now bringing the content rights owners to the iTunes retail mechanism under the "Agency Model". Contrary to the Amazon.com wholesale model, Apple is letting the content rights owners to sell directly their content at the price they want, with Apple taking a 30% commission on the transaction. The business idea is more appealing to content rights owners because they can now control the price, the time of the distribution and the quality of the content while relying on Apple's high level of customer experience for the payment, delivery and management (customer service) of the content.

At the same time Apple understands that a non-connected device is a dead device, and has managed to force AT&T to propose an all-you-can-eat, pre-paid mobile data plan similar to what Internet Service Providers have been proposing for years, moving away from the locked-in two year plan. The recently announced lift of the ban over 3G VoIP service on the iPhone (and therefore iPad) could be the stepping stone for free phone calls for everyone.

By creating a seamless, high quality customer experience 'one stop shop' for all digital entertainment content, Apple is creating a marketplace in which all content compete with each other, eventually forcing by “network effect” the remaining content rights owners to give access to their catalog.

Thanks to Apple's vertical integration across the entire stack (hardware and software), its intuitive and consistent user interface, highly attractive designs and ubiquitous presence in the consumers' life, Apple consumers can choose with which devices the content will be consumed, when and where they want.

What's Next?

With the launch of the iPad tablet, Apple has managed to offer to a small consumer segment (the early adopters) all digital content across all consumer devices, charging a high price for hardware, software and content. Apple has managed to become the ultimate digital go-between company for high quality and high price content in a small yet very affluent segment of the population.

Apple’s digital lifestyle strategy could easily be seen as a central piece of hard drive (AppleTV or Macintosh), a home remote control (iPad), an internet connection, a voice device (iPhone), portable music device (iPod), and retail mechanism (iTunes), creating the ultimate connected consumer of the future. The next steps will be for the company to bring more digital content and increase its market share, and we know that Steve Jobs can deliver on both of these.

Apple with its both closed and integrated business concepts has successfully managed to convince major content providers to finally move safely to the digital world. Even though history is telling us that closed and expensive digital solutions have difficulties competing in the long run with more open and collaborative systems, at least we can recognized that Apple is the first mover with the competitive advantage to aggregate all media for consumers… at least for these first few years.