Sunday, February 12, 2017

Why Are They Twittering? A Modest Proposal.

Twitter just reported another in a string of 'disappointing' financial reports showing:
   - year-over-year revenue growth below 1%
   - effectively flat user growth (4.5% yer-over-year vs 3.3% 3Q year-over-year)
   - average revenue per user (ARPU) fell 4%
   - global ad revenue flat, US ad revenue down 7%
   - stock-based compensation up1%, marketing expenses up
   - operating loss on $771M

TWTR is hitting new lows on the news, but the company still has an $11B market cap.

This valuation reflects classic "there must be a pony in here somewhere" thinking - shareholders are generally loathe to watch their investment (or stock options) burst into flame, so it is not surprising to see intense amounts of flailing and bloodletting while players scramble to patch the leaks in this Titanic.

Just before this report, I had the opportunity to explore Twitter's future with a bunch of undergraduate business majors.  Not one of the 30 or so students (who should be squarely in the company's target market) claimed to be a regular Twitter user.  Not one of them said they would pay a subscription for the service.  When asked to imagine what Twitter might do differently, their responses were not much different from what Twitter management is proposing - but when I asked how successful any of those moves might be, I got shoulder shrugs.

One brave soul suggested that Twitter close down, not unlike Michael Dell's approach to Apple during that company's darker days.  While I can see the merits in that option (it's certainly better than watching the company's cash pile shrivel to zero), I think there is something about Twitter that keeps everybody from just throwing up their hands.  But that something may not be, as they say, "monitizable".

Where Twitter has consistently shown value and differentiation is as a lightweight, organic, slippery communications conduit for transient social events - from fluff like the latest Kardashian antics to
more meaningful events, like Arab Spring.  This makes sense given its embrace of lightweight clients built around SMS messaging.

Twitter has tried to get celebrities to pay the freight with 'promoted' tweets, and there is probably a niche market in the PR industry for this that is sustainable, but not at the scale dreamed by Twitter investors.  Likewise, there may also be a news industry niche as a headline aggregator.  Both of those niches, however, are coming under more intense fire from competitors.

One Twitter response is video.  Not only is Twitter late to this party, but stuffing a Twitter feed with video a) requires a bigger client that is harder to make ubiquitous), and b) gums up the lightweight, casual Twitter interface that is one of its key differentiators.

So, Twitter may ultimately be one of those good ideas that is not a good business.  If the world values the original idea, a non-shutdown option presents itself:  turn Twitter into a non-profit.

Making Twitter a non-profit organization would preserve the parts of Twitter that society seems to value, while freeing it of the constant struggle to justify its existence to Wall St.

It is possible?  Maybe.  What if:
    - A majority of Twitter shareholders agree that this is a good idea (or at least a way to salvage
      something from their investment)
    - The IRS lets shareholders contribute their TWTR stock to a new tax-exempt non-profit
       foundation and take a deduction (at their basis, not an inflated value)?
    - Substantial additional reductions in headcount get operating expenses to a level that
      can be supported by interest on Twitter's existing cash (around $3B) plus some donations
      from foundations interested in freedom of speech and communications around the world?
      This would imply some R&D to make messages hard to stop.

That organization would have a comprehensible mission, and the hope of a sustainable future.
As opposed to Twitter, which has an incomprehensible mission, and a dubious future.


Full disclosure:  I'm an extremely casual (a few times a year) Twitter user.  It doesn't work on my dumb phone.  I tried on my desktop, and the content wasn't compelling compared to my Facebook feed.  I get my stupid Presidential tweet fix from Facebook re-posts.  I'm not trying to build a business based on "followers", so that aspect is also irrelevant.  After this experience, I am reminded of nothing so much as Biggus Dickus's query in Monty Python's Life of Brian:  "Why are they twittering"?






Thursday, August 16, 2012

Found while following Apple/Samsung antics

A long, long time ago, I put my feet up and imagined what could happen given the trajectory of several technologies.  I'm not claiming anything, but I continue to be chagrined about the dysfunctions of the US patent system and the definitions of "novelty", "obviousness", "prior art", and "skilled practitioner".

This was published in 1998 (click near the page number for larger view):







































Now, back to my popcorn.

Tuesday, June 19, 2012

Scratching the Surface

It requires a certain critical mass for me to emit a blog post.  Yesterday's unveiling of the Microsoft Surface devices has prompted copious product commentary, but I think the big story has little to do with speeds and feeds, or competition with Apple.

The Surface announcement is the best demonstration of the systemic weakness of the Wintel ecosystem, ever.  While multiple sources of pressure have been building to strain this long-standing duopoly, Microsoft's decision to manufacture its own tablet device may well push the water over the edge of the dam.

In addition, as a Microsoft shareholder, I'm concerned about the impact of this announcement on the company's overall performance.  More on that later.

First, the industry impact.  If we set the wayback machine far enough, we can go back to a time when personal computer manufacturers actually added substantial value beyond the semiconductor components supplied by Intel and its competitors.

A company called Compaq, for instance, distinguished itself in the business market by spending significantly on R&D to make Intel-based hardware reliable and serviceable enough to be taken seriously by enterprise customers.  They were able to charge a premium for their work.

Compaq's competitors, like Dell, were happier to take Intel reference designs, which were not quite as robust, bend some metal around them, and compete on price.  Intel and Dell responded by labeling Compaq solutions "proprietary" and simultaneously adding features into their reference designs, reducing their value to commodity levels.  Dell and its ilk won.

Intel was also working hard to migrate more and more value of a PC into its chips.  They were fairly successful at this, ultimately capturing most of the value in a PC and leaving table scraps of margin for their OEM partners.  Years ago I imagined that Intel might just go ahead and put the OEMs out of their misery, but it dawned on me that Intel was brilliant in outsourcing the misery - why would they want it?

The other winner at the head of the PC food chain was, of course, Microsoft.  They basically collected a tax on every Intel-based unit sold by every company except Apple.  Life was good in Redmond.

Meanwhile, at the end of the value chain. PC companies were fighting over increasingly smaller scraps.   The shakeout killed Micron, Gateway, and, ultimately, Compaq.  IBM had the good sense to see the handwriting on the wall and rebuild its company around services.  Now HP and Dell are trying to catch up.

Meanwhile, Wintel-based product design has suffered from a combination of consumer malaise and OEM fear, resulting in underspending in R&D.  Above the chip level, Intel has maintained a leisurely  R&D pace, with the ultrabook reference design a recent example.  But, as we all know, Apple spoiled the party by creating a new category and nailing it with the iPad and its app ecosystem.  Android tablets piled on.  Wintel OEM response has been ham-fisted at best, partially because neither Intel nor Microsoft was ready with a fast response.

But Wintel OEMs are also fighting for their survival, are being pulled in multiple directions from external and internal forces, and are shedding resources like clothing on a hot day.  Microsoft must have felt that, left to their own devices, it would take so long for OEM partners to come around that it would be impossible to play catchup.

In addition, Microsoft could do the same bill of material arithmetic everyone else was doing and conclude that, for some devices, ARM had a place and an Intel premium was not worth paying.

The result - Microsoft takes matters into its own hands.  It uses an ARM processor to compete on price, and an Intel processor to ride its Office monopoly.  These are not dumb moves.

But,  Microsoft has hit its OEM partners squarely in the face.  This is not a Zune. nor is it a Microsoft mouse, each of which could have complemented an OEM product.  If successful, Surface devices will take lots of dollars away from mainstream OEM products.

Intel probably views the ARM-based Surface as a minor annoyance.  They have seen Microsoft move to other processor architectures before (NT on Alpha, anyone?), and know they can usually play the long game and win business back.

But the PC OEMs are a different story.  I'd hate to be at HP while I watch the last vestiges of any proprietary advantage in tablets with WebOS walk out the door.  I'd like to think that Google might use this event as a reason to really woo PC OEMs with a non-balkanized version of Android, but I'm not holding my breath.  Besides, Google would have to come up with a unified Android app marketplace that OEMs could white label, and share revenue.  That could happen.  And pigs could also fly.

It's no sure thing that Microsoft will make Surface work.  But let's suppose they do.  As a MSFT shareholder, I can therefore look forward to some increased revenue, and lower gross margins as hardware gross margins become a more significant part of the Microsoft product mix.  And I'm wondering, why in heck isn't there a new arms-length company being formed to do this, so margins aren't diluted across the enterprise?  Intel continues to outsource value chain misery, and here is Microsoft jumping to take it on.

For an outside observer, the new array of moving pieces created by this announcement is awe-inspiring in its complexity and unpredictability.  The Surface announcement party may be over, but the real fun in Wintel-land is just beginning.

Tuesday, April 17, 2012

Rational Economic Behavior and the Internet: Why You Want to Pay Per Packet

Originally published in 2010.
Verizon has raised my rates since then.  Grrr.
This bolsters my argument.


It’s always dangerous to give me spare time, an Internet connection, and a calculator.  I have been thinking about this particular issue for many years — any kind of “all you can eat” model has always struck me as suboptimal, and my reaction to the growing popularity of flat rate Internet connection pricing based on connection speed is the same as my reaction when Pets.com offered free shipping on 50-pound bags of dog food back in the day: buy all you can, ‘cause this deal can’t last.

Internet customers (at least in the US) seem to have figured this out.  Their usage of bandwidth continues to grow at very high rates while flat-rate pricing is the norm. This is rational producer and consumer
behavior; there is neither disincentive to produce “fat” content or applications nor disincentive to consume them. This has been a lurking but invisible problem in the wired world, where bandwidth is relatively cheap. But the problem has become visible recently in the wireless world, where bandwidth is more expensive (because it is more scarce). We have all seen reports of wireless carriers struggling to keep up with network demand created by the latest smartphone or media application.

It costs real money to upgrade networks to keep pace with this demand, and those costs are ultimately borne by the subscriber. So in the US, we have carriers trying to raise their rates to offset increases in capital and operating expenses to the point where consumers are beginning to push back, and the shoving has come to the attention of the Federal Communications Commission, which has raised the possibility of treating Internet network providers as common communications carriers subject to regulation.

I believe that flat-rate pricing is a major source of problems for network carriers and consumers. In the carrier world, the economics are known but ignored because marketers believe that flat rates are the only plans consumers will accept. But in the consumer world, flat rates are rising to incomprehensible levels for indecipherable reasons, with little recourse except disconnection. Consumer dissatisfaction is rising, in part because consumers feel they have no control over the price they have to pay. This is driven by their sense of pricing inequity that is hard to visualize but comes from implicit subsidies in the current environment. The irony is that pay-per-use pricing solves the problem for carriers and consumers.

The Current State
Let’s do some arithmetic. I went to the statistics page on my router, where it reported that in the past 47 days I had sent and received around 15 million Internet packets. I rounded that up to 20 million,
then derived the following:

         - 20 million packets in 47 days
         - 425,532 packets/day
         - 12,765,597 packets/month

How big is a packet? Like many questions, the answer is, “It depends.”  After a little research, I determined that my average packet size was somewhere between 557 and 1,500 (an average rich-media packet size) bytes. Then I made some assumptions about my traffic:


         557 bytes (60% of traffic)
         - 1,500 bytes (40% of traffic)
         -  934 bytes (weighted average packet size)

Now I had an average packet size, and I had my packet traffic per month. So how many bits is that?

         - 7,474 bytes (weighted average bits/packet)
         - 12,765,957 packets/month
         -  95,412,765,957 bits/month

Whoa, that’s a lot of bits. Let’s scale it down to manageable significant digits:

         - 90,993 Mb/month
         - 11,374 MB/month
         - 11 GB/month

This exercise revealed that, in a typical month, I shipped about 11 GB over the Internet (the vast majority was downloaded but for this discussion we will focus on total traffic). Verizon, my provider, charges me about US $64.99 per month, or about $2.17 per day for 25 Mb/sec download speed.2 Some of you might say, “Hey, $2.17 per day is cheap.”  My response is “Compared to what”? Let’s take a look on what I actually consumed:

         - $64.99/month
         -  $2.17/day
         -  $5.85/GB transferred (actual)

Is $5.85 per GB a good or bad deal? Let’s compare that price based on actual usage to the theoretical price I could be paying if I used all of my monthly bandwidth:

         - 26,214,400 bytes at 25Mb/sec peak rate
         - 3,276,800 bytes/sec
         - 11,796,480,000 bytes/hour
         - 11,250 MB/hour
         - 11 GB/hour
         -  0.0107 TB/hour
         -  0.2575 TB/day
         - 8 TB/month

Now, all the carriers disclaim their peak performance numbers; they can be degraded by traffic congestion, phases of the moon, whatever. Let’s pretend that I could actually see the above (and, to be fair, my FiOS service has been generally reliable). That would mean I could transfer 8 TB in a month, compared with the 11 GB that I actually transferred.  That changes the transfer price dramatically:

         - $64.99/month
         -  $5.85/GB transferred (actual)
         - $0.008/GB transferred (theoretical)

Clearly, I should be consuming more. Even rounding up, the price gap between $5.85 per GB and $0.008 per GB is substantial. And herein lies the problem. Since the rate I pay is flat, everything in the gap between 11 GB and 8 TB looks free to me. But I assure you it does not look free to Verizon. If every FiOS subscriber tried to download 8 TB a month, cries of panic would echo throughout the land. A similar exercise for wireless data plans would show higher prices but a smaller gap between actual and theoretical because the theoretical limits are lower.  Some wireless carriers explicitly prohibit extended peak bandwidth use for just this reason.

A Monthly Bill I’d Like to Get
What if, instead of increasing the maximum download speeds for a flat rate, a carrier tried this: pay $0.0000025 per packet — period. The resulting bill would be:

          - $31.91 for 11 GB transferred/month
          - $63.82 for 22 GB transferred/month
          - $22,979 for 8 TB transferred/month

A pricing strategy like this might lower the monthly bill for an average customer as well as allow for some increased consumption without breaking the bank. It would provide the consumer a way to lower costs just by reducing consumption. There would be a substantial disincentive for order-of-magnitude increases in consumption; if the data were really that valuable, this would prove it. Otherwise, consumers would have to think of options:

         1. Do without.
         2. Find a way to make the data more efficient.
         3. Find a cheaper substitute.
         4. Get someone else to pay.

All these options are used by producers and consumers today and form the basis of advertiser- and business-supported messaging. There is no reason to suspect that a motivated advertiser wouldn’t pay to transmit its car ad to a serious prospect. Web site and content creators would be obliged to consider data transmission costs and build more efficient products — or offset their higher costs with direct payments, advertising, or some other explicit subsidy. Carriers could use variable pricing per packet to adapt consumer usage to network capacity variances and expansion.

This past June, AT&T, wireless provider for Apple’s iPhone, became the first major mobile phone company to stop offering new smartphone customers a single monthly price for unlimited Internet access.3 That may signal an industry shift to charges based on how much people use their phones to access videos, music, and data. AT&T expects the new pricing to boost sales. Verizon followed in July.  Newcomers to AT&T can pay $15 per month for 200 MB of data or 2 GB for $25. AT&T says 65% of its smartphone customers use fewer than 200 MB per month, and 98% use fewer than 2 GB. Just 3% of AT&T’s smartphone customers account for as much as 40% of its data traffic. With the limited airwave spectrum available for wireless broadband, other providers may switch to usage-based pricing, including Sprint and T-Mobile. Other businesses may be getting the message as well. Silicon Alley Insider recently reported on the rumored new Apple iTV with the headline, “Apple's New iTV Could Finally Force ISPs to Give Up on All-You-Can-Eat Internet Access and Jack Up Your Bandwidth Bill.”

In short, rational economic behavior would prevail in a pricing environment free of implicit subsidies. This would prove beneficial to content producers, content consumers, and the infrastructure providers that move the bits around. When I look at the problems created and looming by current flat-rate pricing — and consider the advantages of usage pricing — I believe it’s only a matter of time before usage pricing becomes the standard.

In the meantime, use all the bandwidth and transfer all the bits you possibly can. 
This deal is too good to last.


Footnotes:
1 - Slaptijack. “Average IP Packet Size.”  
      Facebook Note, 18 March 2010 (www.facebook.com/note.php?note_id=377237673965).
2 - Verizon offers Web mail and other services for this price. For simplicity, I have ignored all bundled 
      services in this example.
3 -3  Lieberman, David. “New AT&T Smartphone Users Won’t Get One-Price Net.” USA Today
     4 June 2010.
4 -Frommer, Dan. “Apple’s New iTV Could Finally Force ISPs to Give Up on All-You-Can-Eat
     Internet Access and Jack Up Your Bandwidth Bill.” BusinessInsider/Silicon Alley Insider, 
     23 August 2010 (www.businessinsider.com/appleitv-metered-broadband-2010-8).

Friday, October 14, 2011

Remembering Steve Jobs

I was lucky to have had the opportunity to meet and work with Steve Jobs when I was an analyst on Wall Street covering the PC industry.  Mine was a lone voice arguing that Apple could recover from its "beleaguered" state prior to Apple's acquisition of NeXT. Steve's return with that acquisition added an ironic dimension that evolved into one of the great corporate turnarounds in history.

While I had engaged him from a distance through Apple investor relations and conference calls, my first one-on-one meeting with Steve came just after Apple had reported its first profitable quarter since his return. Apple had scheduled an analysts meeting in Cupertino, and all of us dutifully shuttled out to hear what Apple management had to tell us about the company's plans for the future.

When I was introduced to Steve, he recognized me from my public efforts on Apple's behalf, and thanked me for my support during Apple's tough times. Those of you who know me can imagine my response. Figuring I might never get the chance again, I told Steve, "Thanks for not f**king it up."
My host wilted. 
Steve grinned.

Shortly after, Apple included a quote from me in a press release announcing its advertising strategy for the iMac. This was one of the only times a non-Apple voice was included in an Apple corporate release, and I'm sure it would not have happened without Steve's approval. While many have described Steve's darker side, many of us can cite examples of gracious behavior like this.

I remember vividly Steve's personal demonstration to me of Mac OS X prior to its announcement, and his focused energy directed at convincing me that the "lickable" new Aqua interface was the greatest thing in the world. Many have seen Steve live on stage or in a video announcing new products; I can only say that it was even more impressive up close, and I enjoyed all my professional interactions with him throughout my tenure on the Street.

When I heard of his passing, my immediate thought was:
Talent hits a target no one else can hit;
Genius hits a target no one else can see.
-- Arthur Schopenhauer
Schopenhauer didn't live to see Steve Jobs, but maybe he predicted him.

Wednesday, August 31, 2011

Remembering My Dad

My father died yesterday.  It wasn't a complete shock - 20 years ago he was diagnosed with prostate cancer and treated with then-new therapies that bought him more time than anyone expected.  He used that time well.  This year, cancer returned in a much more aggressive mode and won its battle for dad's body.  His family was fortunate to be with him in his last days to say goodbye.

My mom, brothers and sister filled dad's hospital room with stories and laughter to the point where nurses were poking their heads in to see the party — and we encouraged visitors to add their voices to the conversation.  Over the course of many days, I was reminded that my siblings each had a unique relationship with dad, but all of those relationships were based on the same values we learned by repeated example:  curiosity, integrity, loyalty, uncompromising excellence and love.

Dad's varied accomplishments in life derived from his unwavering adherence to those values.  They enabled him to become an outstanding competitor, leader, craftsman, husband, father and grandfather.  My mother's expressions of love and loss for her partner of 57 years were an equally compelling commentary on the meaning of marriage.

I loved my dad.  I miss his presence already, and will remember his lessons forever.










Monday, May 17, 2010

Thoughts on Bill Gates' Legacy



Written June 25, 2008 for SearchWinDevelopment.com
I met a traveler from an antique land
Who said: "Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shattered visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear:
`My name is Ozymandias, King of Kings:
Look on my works, ye mighty, and despair!'
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.


--Percy Bysshe Shelley, Ozymandias
I sincerely hope that Bill Gates' legacy is yet to be created, because what passes for common wisdom about his contributions to the computer industry will either fade from memory or be relegated to the arcana of business scholarship.

Readers may raise Microsoft as an objection to my argument. My trite reply is: Thomas Watson and Google. The former built a computing colossus but has faded from everyday IT awareness faster than most would have predicted. The latter is the current darling, a young star yet to experience the ravages of success and time.

People talk about the "genius" of Bill Gates. I find this an overly fawning accolade when I compare him to Einstein, Feynman, Hawking and their (rare) ilk. There is no "Gates algorithm" left for computer scientists to ponder. Yet, he was an unequivocal business success. Is there a different dimension of perception or behavior that warrants the genius label when applied to his accomplishments in the industry?

Maybe. Unlike Einstein's quest for a theory of general relativity, Gates had plenty of competitors racing to make small computers pervasive. But he came from a socio-economic background that enabled him to aggressively follow his dream. He had family connections that put him in contact with the highest levels at IBM at the time when the IBM PC was being developed. He had the great sense to say "yes" when IBM asked if his company had an operating system for their fledging PC. He was, shall we say, shrewd, in his acquisition of MS-DOS. He was equally shrewd in his proposal to IBM that allowed Microsoft to resell DOS to IBM's competitors. And he was triply shrewd when he convinced PC manufacturers to pay for DOS regardless of its residence on their PC products. The fact that the U.S. Justice Department was asleep at the switch during this period made this last move ultimately effective for Microsoft's development. If this be the definition of business genius, then Bill qualifies in spades.

When the Justice Department finally took action against Microsoft, the company had the opportunity to remake itself into smaller, more agile pieces. It did not. Perhaps Bill's biggest business failing was not seeing why this might be a good thing. Microsoft is struggling today, in part, because of its bulk. Furthermore, the bloom is off Microsoft's rose, so the public market has a higher tendency to punish the company for its perceived missteps. This punishment cannot be meted out to the division or product line that is truly responsible, so value is destroyed across the entire enterprise.

IBM is hailed as a company that recovered from the brink of death, a place where many feel Microsoft, at current course and speed, could be headed. IBM's recovery only happened after a parade of less-than-capable CEOs drove its Board to bring on the highly-capable Lou Gerstner. Perhaps Microsoft has not had enough CEOs to develop a corporate sense of what defines inadequacy at the top. Therefore, I suggest another candidate for Bill's biggest failing is his long-standing and apparently continued support for Microsoft's current CEO.

Where my respect for Bill Gates is unbounded is in his decision to use almost his entire fortune for the common good. Unlike so many Silicon Valley "successes" who seem to require personal fulfillment by recreating Japanese palaces or building ever-larger sailboats, Bill's actions in the future could make a real difference in the lives of millions of people and the planet we all share. That legacy might endure.