Internet measurement techniques need a complete overhaul. New ways have emerged, potentially displacing older panel-based technologies. This will make it hard for incumbent players to stay in the game.

The web user is the most watched consumer ever. For tracking purposes, every large site drops literally dozens of cookies in the visitor’s browser. In the most comprehensive investigation on the matter, The Wall Street Journal found that each of the 50 largest web sites in the United Sates, weighing 40% of the US page views, installed an average of 64 files on a user device. (See the WSJ’s What They Know series and a Monday Note about tracking issues.) As for server logs, they record every page sent to the user and they tell with great accuracy which parts of a page collect most of the reader’s attention.

But when it comes to measuring a digital viewer’s commercial value, sites rely on old-fashioned panels, that is limited user population samples. Why?

Panels are inherited. They go back to the old days of broadcast radio when, in order to better sell advertising, dominant networks wanted to know which station listeners tuned in to during the day. In the late thirties, Nielsen Company made a clever decision: they installed a monitoring box in 1000 American homes. Twenty years later, Nielsen did the same, on a much larger scale, with broadcast television. The advertising world was happy to be fed with plenty of data — mostly unchallenged as Nielsen dominated the field. (For a detailed history, you can read Rating the Audience, written by two Australian media academics). As Nielsen expanded to other media (music, film, books and all sorts of polls), moving to the internet measurement sounded like a logical step. As of today, Nielsen only faces smaller competitors such as ComScore and others.

I have yet to meet a publisher who is happy with this situation. Fearing retribution, very few people talk openly about it (twisting the dials is so easy, you know…), but hey all complain about inaccurate, unreliable data. In addition, the panel system is vulnerable to cheating on a massive scale. Smarty pants outfits sell a vast array of measurement boosters, from fake users that will come in just once a month to be counted as “unique” (they are indeed), to more sophisticated tactics such as undetectable “pop under” sites that will rely on encrypted URLs to deceive the vigilance of panel operators. In France for instance, 20% to 30% of some audiences can be bogus — or largely inflated. To its credit, Mediametrie — the French Nielsen affiliate that produces the most watched measurements — is expending vast resources to counter the cheating, and to make the whole model more reliable. It works, but progress is slow. In August 2012, Mediametrie Net Ratings (MNR), launched a Hybrid Measure taking into account site centric analytics (server logs) to rectify panel numbers, but those corrections are still erratic. And it takes more than a month to get the data, which is not acceptable for the real-time-obsessed internet.

Publishers monitor the pulse of their digital properties on a permanent basis. In most newsrooms, Chartbeat (also imperfect, sometimes) displays the performance of every piece of content, and home pages get adjusted accordingly. More broadly, site-centric measures detail all possible metrics: page views, time spent, hourly peaks, engagement levels. This is based on server logs tracking dedicated tags inserted in each served page. But the site-centric measure is also flawed: If you use, say, four different devices — a smartphone, a PC at home, another at work, and a tablet — you will be incorrectly counted as four different users. And if you use several browsers you could be counted even more times. This inherent site-centric flaw is the best argument for panel vendors.

But, in the era of Big Data and user profiling, panels no longer have the upper hand.

The developing field of statistical pairing technology shows great promise. It is now possible to pinpoint a single user browsing the web with different devices in a very reliable manner. Say you use the four devices mentioned earlier: a tablet in the morning and the evening; a smartphone for occasional updates on the move, and two PCs (a desktop at the office and a laptop elsewhere). Now, each time you visit a new site, an audience analytics company drops a cookie that will record every move on every site, from each of your devices. Chances are your browsing patterns will be stable (basically your favorite media diet, plus or minus some services that are better fitted for a mobile device.) Not only your browsing profile is determined from your navigation on a given site, but it is also quite easy to know which sites you have been to before the one that is currently monitored, adding further precision to the measurement.

Over time, your digital fingerprint will become more and more precise. Until then, the set of four cookies is independent from each other. But the analytics firm compiles all the patterns in single place. By data-mining them, analysts will determine the probability that a cookie dropped in a mobile application, a desktop browser or a mobile web site belongs to the same individual. That’s how multiple pairing works. (To get more details on the technical and mathematical side of it, you can read this paper by the founder of Drawbridge Inc.) I recently discussed these techniques with several engineers both in France and in the United Sates. All were quite confident that such fingerprinting is doable and that it could be the best way to accurately measure internet usage across different platforms.

Obviously, Google is best positioned to perform this task on a large scale. First, its Google Analytics tool is deployed over 100 millions web sites. And the Google Ad Planner, even in its public version, already offers a precise view of the performance of many sites in the world. In addition, as one of the engineers pointed out, Google is already performing such pairing simply to avoid showing the same ad twice to a someone using several devices. Google is also most likely doing such ranking in order to feed the obscure “quality index” algorithmically assigned to each site. It even does such pairing on a nominative basis by using its half billion Gmail accounts (425 million in June 2012) and connecting its Chrome users. As for giving up another piece of internet knowledge to Google, it doesn’t sounds like a big deal to me. The search giant knows already much more about sites than most publishers do about their own properties. The only thing that could prevent Google from entering the market of public web rankings would be the prospect of another privacy outcry. But I don’t see why it won’t jump on it — eventually. When this happens, Nielsen will be in big trouble.

– frederic.filloux@mondaynote.com

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We know Intel shunned ARM processors and played virtually no role in the smartphone revolution. But we now learn Steve Jobs asked Intel to build the iPhone microprocessor. Paul Otellini, Intel’s departing CEO, admits he should have followed his gut – and made the smartphone world a very different place.

CEO valedictions follow a well-known script: My work is done here, great team, all mistakes are mine, all good deeds are theirs, I leave the company in strong hands, the future has never been brighter… It’s an opportunity for a leader to offer a conventional and contrived reminiscence, what the French call la toilette des souvenirs (which Google crudely translates as toilet memories instead of the affectionate and accurate dressing up memories).

For his farewell, Paul Otellini, Intel’s departing CEO, chose the interview format with The Atlantic Monthly’s senior editor Alexis Madrigal. They give us a long (5,700+ words) but highly readable piece titled Paul Otellini’s Intel: Can the Company That Built the Future Survive It?

Photo: Guardian.co.uk

The punctuation mark at the title’s end refers to the elephantine question in the middle of Otellini’s record: Why did Intel miss out on the smartphone? Why did the company that so grandly dominates the PC market sit by while ARM architecture totally, and perhaps irretrievably, took over the new generation of phones — and most other embedded applications?

According to Otellini, it was the result of Intel’s inertia: It took a while to move the machine.

Madrigal backfills this uneasy explanation with equal unease:

“The problem, really, was that Intel’s x86 chip architecture could not rival the performance per watt of power that designs licensed from ARM based on RISC architecture could provide. Intel was always the undisputed champion of performance, but its chips sucked up too much power. In fact, it was only this month that Intel revealed chips that seem like they’ll be able to beat the ARM licensees on the key metrics.”

Note the tiptoeing: Intel’s new chips “seem like” they’ll be fast enough and cheap enough. Madrigal charitably fails to note how Intel, year after year, kept promising to beat ARM at the mobile game, and failed to do so. (See these 2010, 2011 and 2012 Monday Notes.) Last year, Intel was still at it, dismissively predicting “no future for ARM or any of its competitors“. Tell that to ARM Holdings, whose licensees shipped 2.6 billions chips in the first quarter of this year.

Elsewhere in the article, Otellini offers a striking revelation: Fresh from anointing Intel as the microprocessor supplier for the Mac, Steve Jobs came back and asked Intel to design and build the CPU for Apple’s upcoming iPhone. (To clarify the chronology, the iPhone was announced early January, 2007; the CPU conversation must have taken place two years prior, likely before the June, 2005 WWDC where Apple announced the switch to x86. See Chapter 36 of Walter Isaacson’s Jobs bio for more.)

Intel passed on the opportunity [emphasis mine]:

“We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it, […]

Indeed, the world would have been different. Apple wouldn’t be struggling through a risky transition away from Samsung, its frenemy CPU supplier; the heart of the iPhone would be Made In America; Intel would have supplied processors for more than 500 million iOS devices, sold even more such chips to other handset makers to become as major a player in the smartphone (and tablet) space as it is in the PC world.

Supply your own adjectives…

Indulging briefly in more What If reverie, compare the impact of Intel’s wrong turn to a better one: How would the world look like if, at the end of 1996, Gil Amelio hadn’t returned Apple back to Steve Jobs? (My recollection of the transaction’s official wording could be faulty.)

So, again, what happened?

At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.“

A little later, Otellini completes the train of thought with a wistful reverie, a model of la toilette des souvenirs:

“The lesson I took away from that was, while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut,” he said. “My gut told me to say yes.”

The frank admission is meant to elicit respect and empathy. Imagine being responsible for missing the opportunity to play a commanding role in the smartphone revolution.

But perhaps things aren’t as simple as being a “gut move” short of an epochal $100B opportunity.

Intel is a prisoner of its x86 profit model and Wall Street’s expectations. It’s dominant position in the x86 space give Intel the pricing power to command high margins. There’s no such thing in the competitive ARM space, prices are lower. Even factoring in the lower inherent cost of the somewhat simpler devices (simpler for the time being; they’ll inevitably grow more complex), the profit-per-ARM chip is too thin to sustain Intel’s business model.

(Of course, this assumes a substitution, an ARM chip that displaces an x86 device. As it turns out, the smartphone business could have been largely additive, just as we now see with tablets that cannibalize classical PCs.)

Another factor is the cultural change that would have been required were Intel to have gotten involved in making ARM devices. As both the designer and manufacturer of generation after generation of x86 microprocessors, Intel can wait until they’re good and ready before they allow PC makers to build the chips into their next products. The ARM world doesn’t work that way. Customers design their own chips (often called a System on a Chip, or SoC), and then turn to a semiconductor manufacturer (a foundry) to stamp out the hardware. Taking orders from others isn’t in Intel’s DNA.

And now?

The answer might lie in another French expression: L’histoire ne repasse pas les plats. Google Translate is a bit more felicitous this time: History does not repeat itself. I prefer the more literal image — History doesn’t come around offering seconds — but the point remains: Will there be seconds at the smartphone repast?

Officially, Intel says its next generation of x86 processors will (finally!) topple the ARM regime, that their chips will offer more computing might with no cost or power dissipation penalty. In their parlance “the better transistor” (the basic unit of logic processing) will win.

I doubt it. The newer x86 devices will certainly help Microsoft and its OEMs make Windows 8 devices more competitive, but that won’t prevent the spread of ARM in the legion of devices on which Windows is irrelevant. For these, Intel would have to adopt ARM, a decision Otellini has left to the new tandem leadership of Brian Krzanich (CEO) and Renée James (President). Will they stick to the old creed, to the belief Intel’s superior silicon design and manufacturing technology will eventually overcome the disadvantages of the more complex x86 architecture? Or will they take the plunge?

They might be helped by a change in the financial picture.

In 2006, that is after throwing Jobs in Samsung’s arms (pun unintended), Intel sold its ARM business, the XScale line, to Marvell. The reason was purely financial: for similar capital expenditures (costly fabs), ARM processors achieved much lower per-unit profit, this because of the much more competitive scene than in the x86 space.

Now, if Intel really wants to get a place at the smartphone table with new and improved x86 devices, the company will have to price those to compete with established ARM players. In other words, Intel will have to accept the lower margins they shunned in 2006. Then, why not do it with the ARM-based custom processors Apple and others require?

– JLG@mondaynote.com

—————————-

(I’ll confess a weakness for The Atlantic and, in particular, for its national correspondent James Fallows, a literate geek and instrument-rated pilot who took upon himself to live in Beijing for a while and, as a result, can speak more helpfully about China than most members of the Fourth Estate. Going back to last week’s reference to the Gauche Caviar, when my Café de Flore acquaintances fall into their usual rut of criticizing my adopted country for its lack of “culture”, I hold out that The Atlantic — which sells briskly at the kiosk next door — is one of many examples of American journalistic excellence.

And, if you’re interested in more strange turns, see this other string Alexis Madrigal piece in the same Atlantic: The Time Exxon Went Into the Semiconductor Business (and Failed). I was there, briefly running an Exxon Information Systems subsidiary in France and learning the importance of corporate culture.)–JLG

–

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Both are great American newspapers, both suffer from the advertising slump and from the transition to digital. But the New York Times’ paywall strategy is making a huge difference. 

The Washington Post’s financials provide a good glance at the current status of legacy media struggling with the shift to digital. Unlike others large dailies, the components of the Post’s P&L clearly appear in its statements, they are not buried under layers of other activities. Product-wise, the Post remains a great news machine, collecting Pulitzer Prizes with clockwork regularity and fighting hard for scoops. The Post also epitomizes an old media under siege from specialized, more agile outlets such as Politico, ones that break down the once-unified coverage provided by traditional large media houses. In an interview to the New York Times last year, Robert G. Kaiser, a former editor who had been with the paper since 1963, said this:

“When I was managing editor of The Washington Post, everything we did was better than anyone in the business,” he said. “We had the best weather, the best comics, the best news report, the fullest news report. Today, there’s a competitor who does every element of what we do, and many of them do it better. We’ve lost our edge in some very profound and fundamental ways.”

The iconic newspaper has been slow to adapt to the digital era. Its transformation really started around 2008. Since then, it has checked all the required boxes: integration of print and digital productions; editors are now involved on both sides of the news production and all relentlessly push the newsroom to write more for the digital version; many blogs covering a wide array of topics have been launched; and the Post now has a good mobile application. The “quant” culture also set in, with editors now taking into account all the usual metrics and ratios associated with digital operations, including a live update of Google’s most relevant keywords prominently displayed in the newsroom. All this helped the Post collect 25.6 million unique visitors per month, vs. 4 to 5 million for Politico, and 35 million for the New York Times that historically enjoys a more global audience.

Overall, the Washington Post Company still relies heavily on its education business, as show in the table below :

 Revenue:.......$4.0bn (-3% vs. 2011)
 Education:.....$2.2bn (-9%)
 Cable TV:......$0.8bn (+4%)
 Newspaper:.....$0.6bn (-7%)
 Broadcast TV:..$0.4bn (+25%)

But the education business no is longer the cash cow it used to be. Not only did its revenue decrease but, last year, it lost $105m vs. a $96m profit in 2011. As for the newspaper operation, it widened its losses to $53m in 2012 from $21m in 2011. And the trend worsens: for the first quarter of 2013, the newspaper division’s revenue decreased by 4% vs. a year ago and it lost $34m vs. $21m for Q1 2011.

Now, let’s move to a longer-term perspective. The chart below sums up the Post’s (and others legacy media’s) problem:

Translated into a table:

                  Q1-2007   Q1-2013  Change %
 Revenue (All):....$219m.....$127m.....-42%
 Print Ad:.........$125m.....$49m......-61%
 Digital Ad:.......$25m......$26m......+4%

A huge depletion in print advertising, a flat line (at best) for digital advertising, the elements sum up the equation faced by traditional newspapers going from print to online.

Now, let’s look at the circulation side using a comparison with the New York Times. (Note that it’s not possible to extract the same figures for advertising from the NYT Co.’s financial statements because they aggregate too many items.) The chart below shows the evolution of the paid circulation for the Post between 2007 and 2013:

..and for the NY Times:

Call it the paywall effect: The New York Times now aggregates both print and digital circulations. The latter now amounts to 676,000 digital subscribers that have been recruited using the NYT’s metered system (see previous Monday Notes under the “paywall” tag). (Altogether, digital subscribers to the NYT, the International Herald and the Boston Globe now number 708,000). It seems the NYT found the right formula: its digital subscribers portfolio grows at a 45% per year rate, thanks to a combination of sophisticated marketing, mining customer data and aggressive pricing (it even pushes special deals for Mother’s Day.) All this adds to the bottom line: if each digital sub brings $12 a month, the result is about $100m that didn’t exist two years ago. But it does not benefit the advertising side as it continues to suffer. For the first quarter of 2013 vs. the same period last year, the NYT Company lost 13% in print ads revenue and 4% for digital ads. (As usual in their earning calls, NYT officials mention the deflationary effects of ad exchanges as one cause of erosion in digital ads.)

One additional sign that digital advertising will remain in the doldrums: Politico, too, is exploring alternatives; it will be testing a paywall in a sample of six states and for its readers outside the United States. The system will be comparable to the NYT.com or the FT.com, with a fixed number of articles available for free. Says Politico’s management in a memo:

It is increasingly clear that readers are more willing than we once thought to pay for content they value and enjoy. With more than 300 media companies now charging for online content in the U.S., the notion of paying to read expensive-to-produce journalism is no longer that exotic for sophisticated consumers.

– frederic.filloux@mondaynote.com

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Elon Musk, Tesla’s CEO, saw its latest creation, the Model S – and himself – criticized by traditional media. Now, Tesla just scored its first profitable quarter and Consumer Reports put the Model S at the top of its rankings, making it possible for Musk’s company to become more than a niche player.

Palo Alto is known, primarily, as the cradle of high-tech. Its birth registry stretches from pre-World War II Hewlett-Packard, to Cisco, Sun Microsystems (after Stanford University Network), Logitech, and on to Google and Facebook.

But there’s an aspect of the town that’s rarely remarked upon. As a happy Palo Alto resident for 25 years as well as a half-century regular at the Café de Flore and Au Sauvignon, I can attest that Palo Alto vies with Paris’ Left Bank as the cynosure of the Gauche Caviar — the Caviar Left, the Volvo Liberals as they were known eons ago. Palo Altans, like the residents of the sixth arrondissement, have money and they’re willing to spend it (this isn’t constipated New England, after all) — but they only spend it in the proper way. And there’s no better way to demonstrate that you’re spending your money in a seemly fashion than to be seen driving the proper car.

The combination of tech culture, money, and sincere (if easily lampooned) social/ecological awareness make Palo Alto an interesting place to watch automotive fashion wax and wane.

Walking Palo Alto’s leafy streets in the early 2000′s, I witnessed the rise of the Prius. Rather than grafting “green” organs onto a Camry or a disinterred Tercel, Toyota’s engineers had designed a hybrid from the tires up…and they gave the car a distinctive, sui generis look. It was a stroke of genius, and it tickled us green. What better way to flaunt our concern for the environment while showing off our discerning tech taste than to be spotted behind the wheel of a Prius? (I write “us” without irony: I owned a Gen I and a Gen II Prius, and drive a Prius V in France.) Palo Alto was Prius City years before the rest of the world caught on. (Prius is now the third best-selling car worldwide; more than a million were sold in 2012.)

The cute but artificial Volkswagen Beetle came and went. The Mini, on the other hand, has been a success. A coupling of British modesty and German engineer (the car is built by BMW), the Mini proved that Americans could fall in love with a small car.

The Smart, an even smaller car, hasn’t fared well at all. There are now more older Citroëns than Smarts on our streets. I also see some tiny Fiat 500s, but too few so far to call it a durable trend.

Then there’s Tesla. In 2008, when the Tesla Roadster came out, I watched it with mixed feelings: some in my neighborhood ended up on flatbeds, but I smiled as I saw Roadsters smoothly (and silently) outrun a Porsche when the traffic light turned green.

As much as I admired Elon Musk, Tesla’s founder and a serial entrepreneur of PayPal fame, I was skeptical. A thousand-pound battery and electric drive train in a Lotus frame…it felt like a hack. This was a beta release car, a $100k nano-niche vehicle. It wasn’t seemly.

Musk muscled his way through, pushed his company onto firmer financial ground, and, in June 2012, Tesla began delivery of the Model S. This is a “real” car with four doors, a big trunk (two, actually, front and back), and a 250 mile (400 km) range. Right away, the sales lot at Tesla’s corporate store in nearby Menlo Park was packed. I started to see the elegant sedan on our streets, and within a few months there were three Model Ss in the parking garage at work. With their superior range, they rarely feed from the EV charging stations. (The Nissan Leaf, on the other hand, is a constant suckler.)

This was a big deal. The company had jumped straight from beta to Tesla 2.0. The bigwigs in the automotive press agreed: Motor Trend and Automobile Magazine named the Model S their 2012 Car of the Year.

Actually, not all the bigwigs agreed. The New York Times’ John Broder gushed over the Model S’s futuristic engineering (“The car is a technological wonder”), but published an ultimately negative story titled Stalled Out on Tesla’s Electric Highway. The battery wouldn’t hold a charge, the car misreported its range, Tesla support gave him bad information… The car ended up being hauled off on a flatbed.

Broder’s review didn’t evince much empathy from Elon Musk, a man who clearly doesn’t believe the meek will inherit the Earth. In a detailed blog post backed up by the data the data that was logged by the car, Tesla’s CEO took Broder to task for shoddy and fallacious reporting:

As the State of Charge log shows, the Model S battery never ran out of energy at any time, including when Broder called the flatbed truck…
During the second Supercharge… he deliberately stopped charging at 72%. On the third leg, where he claimed the car ran out of energy, he stopped charging at 28%.

More unpleasantness ensued, ending with an uneasy statement from Margaret Sullivan, The NYT’s Public Editor: Problems With Precision and Judgment, but Not Integrity, in Tesla Test, and with Musk claiming that the NYT story had cost Tesla $100M in market cap.

Other writers, such as David Thier in Forbes, rushed to Broder’s defense for no reason other than an “inclination”:

I’m inclined to trust the reporter’s account of what happened, though at this point, it barely matters. The original story is so far removed that mostly what we have now is a billionaire throwing a temper tantrum about someone who said mean things about him.

In “Why the great Elon Musk needs a muzzle” (sorry, no link; the article is iPad only) Aaron Robinson of Car and Driver Magazine condemns Musk for the sin of questioning the infallibility of the New York Times:

(There’s no need to pile onto this argument, but let’s note that the NYT’s foibles are well-documented, such as, I can’t resist, its tortured justification for not using the word “torture” when dealing with “enhanced interrogation”.)

None of this dampened the enthusiasm of customers living in our sunnier physical and psychological clime. I saw more and more Model Ss on the streets and freeways. Most telling, the Model S became a common sight in the parking lot at Alice’s Restaurant up the hill in Woodside, a place where bikers and drivers of fashionable cars, vintage and cutting edge, gather to watch and be watched.

Publishing deadlines can be cruel. A few days after Robinson’s story appeared in Car and Driver, Tesla released its quarterly numbers for Q1 2013 (click to enlarge):

Tesla’s $555M in revenue is an astonishing 20x increase compared to the same quarter a year ago. Tesla is now profitable; shares jumped by more than 37% in two trading sessions. On Wall Street paper, the company’s $8.77B market cap makes it worth about 20% of GM’s $42.93B capitalization… Musk got his “lost $100M” back and more.

Curiously, the numbers also show that while Operations were in the red, the company recorded a Net Income of $11M. How is that possible? The explanation is “simple”: If your car company manufactures vehicles that surpass (in a good way) California’s emissions standards, the state hands you Zero Emissions Vehicle Credits for your good behavior. You can then sell your virtue to the big car companies – Chrysler, Ford, GM, Honda — who must comply with ZEV regulations. For Tesla, this arrangement resulted in “higher sales of regulatory credits including $67.9 million in zero emission credit sales”.

Tesla is careful to note that this type of additional income is likely to disappear towards the end of 2013. (For a more detailed analysis of Tesla’s numbers see this post from The Truth About Cars, a site that recommends itself for not being yet another industry mouthpiece.)

The numbers point to a future where Tesla can leave its niche and become a leading manufacturer in a too-often stodgy automotive industry. And, of course, we Silicon Valley geeks take great pleasure in a car that updates it software over the air, like a smartphone; that has a 17″ touchscreen; and that’s designed and built right here (the Tesla factory is across the Bay in the NUMMI plant that was previously occupied by Toyota and GM).

A last dollop of honey in Elon’s revenge: Coinciding with the Car and Driver screed, Consumer Reports gave the Model S its top test score. After driving a friend’s Model S at adequate freeway speeds, I agree, it’s a wonderful car, a bit of the future available today.

Some say the Model S is still too pricey, that it’s only for the very well-off who can afford a third vehicle, that it will never reach a mass audience. It’s a reasonable objection, but consider Ferrari: It sold 7318 cars in 2012 and says it will restrict output in 2013 to less than 7,000 to “keep its exclusivity” – in other words, it must adapt to the slowing demand in Europe and, perhaps, Asia. Last year, Land Rover sold about 43,000 cars in the US. By comparison, Tesla will sell about 20,000 cars this year and expects to grow further as it opens international distribution.

One more thing: Elon Musk is also the CEO of SpaceX, a successful maker of another type  of vehicles: space-launch rockets.

– JLG@mondaynote.com

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“Carriers are confident we won’t read the small print that contradicts their tricky advertising. Once in a while, a public servant really does his job and forces a retraction. Why so rarely?.”

‘My goal in life has been to have just enough money to ignore 8-point Helvetica!’ Thus spake a close friend one night in a quiet San Francisco bar. His objection was neither stylistic nor ophthalmologic. We were, once again, lamenting the shenanigans and ruses, the hidden fees and “some restrictions apply” (see, if you can, Sprint’s mendacious use of Truly Unlimited here and here), the roach motels of mileage plans, the nickels and dimes extracted by subterfuge, legally or not. In a word, or six, the tyranny of the fine print.

By accumulating “just enough money”, my friend has the luxury of not having to fight the schemers to the last dollar, of not spending hours on the phone arguing with a robohuman who has been cruelly programmed to confuse and outlast the overly-curious customer. His benign neglect allows him to keep a sunny view of life and a calm mind.

Lucky man.

Most of us don’t lead such a charmed life. We can’t, or shouldn’t, ignore the amendments, refinements, and exceptions that belie the marketing come-ons. But the fine printers — the airlines, credit card companies, internet providers and, most of all, the cell phone carriers — rely on our neglect, benign or not. They think they can prey on us, that we’re too stupid or lazy to fight back, to protest their obfuscating plans and bizarre bills.

Because of their ubiquity, the cell phone carriers get the most heat. They’ll sell you a $650 iPhone for a mere $200…and then recoup the $450 shortfall by adding a bit of the difference to each installment of your (mandatory) 24 month “service” contract. If you try to break the manacles, you’ll pay for the fractured iron. It’s right there in the fine print.

Last year, a group of concerned professionals called for an end to the confusing and wasteful smartphone subsidies. The group? The carriers themselves (see Carriers Whine: We Wuz Robbed!).

Verizon and AT&T make a spectacle of groaning under the weight of these awful subsidies. They get the Wall Street Journal and others to repeat their stories wholesale in articles such as this one: How the iPhone Zapped Carriers.
Horace Dediu, for one, doesn’t buy the sob story:

“I repeat what I’ve mentioned before: The iPhone is primarily hired as a premium network service salesman. It receives a ‘commission’ for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.”

Dediu’s observation applies equally well to all the top smartphone brands. They’re all bait, a great way to hook the customer into a revolving 24 month agreement, with high ARPUs (Average Revenue Per User) stemming from the nature, the breadth and attractiveness of services provided by these high-end devices.

T-Mobile, the perennial dark horse, has been one of the more vocal plaintiffs. Besides clearly stating that the company didn’t need the iPhone, T-Mobile has hinted that it would get rid of the blood-sucking payments to handset makers altogether.
Last month, the hints became reality. T-Mobile “re-imagined” itself as the Un-Carrier:

T-Mobile’s pitch:

“With no more annual service contract required, we don’t lock you into a big commitment with our Simple Choice Plan.“

It’s a clever idea: T-Mobile has seemingly decoupled hardware and service. If you bring your own phone, you just pay for service. If you need a phone, T-Mobile will be happy to sell you one, let’s say a 16Gb iPhone 5 for $99…and as an added convenience (watch the left hand), they’ll offer you a 24-month contract at just $20/month! You want out before serving your 2-year sentence? No problem! Just pony up the full price of the phone; other terms and conditions may apply.

Inexplicably, some pundits (who should know better) have fallen for the pitch. Here’s David Pogue in the New York Times:

“Last week, the landscape changed. T-Mobile violated the unwritten conspiracy code of cellphone carriers. It admitted that the emperors have no clothes.”

The forums buzzed with the party line: It’s the end of contracts and subsidies.
But the company’s too-clever way with words didn’t sit well with other observers. The no-contract claim is obviously disingenuous; it only applies to people bringing their own phone, a tiny minority. For typical customers — those who get their phones from their carriers — the manacles are too familiar.
The claim also didn’t sit well with Bob Ferguson, Washington State’s Attorney General. Ferguson didn’t dither, saying “No Dice” to T-Mobile’s deceptive “No-Contract” advertising:

“As Attorney General, my job is to defend consumers, ensure truth in advertising, and make sure all businesses are playing by the rules.” 

T-Mobile backed down. The company admitted that there actually is a contract, a subsidy, and they offered to make things right with customers who accepted the agreement under murky pretenses.
Happy ending, congratulations to the vigorous AG.

Still, what were T-Mobile execs thinking? Did they really think that we’re such idiots that we can’t see a 24 month obligation as a contract? What sort of corporate culture produces this type of delusion?
In theory, T-Mobile was onto a good idea. You bring your own phone, you truly pay less and you’re not tied to a contract. Come in, stay as long or as little as you’d like, pay by the month.
But this isn’t how the market works in practice. The rapid succession of new phones makes the latest model more desirable. As a result, carriers have an opportunity to tie their customers down by offering the newest device at an artificially low price — and get a comfortable two-year income stream to recoup the subsidy.
Meanwhile, there’s other news in the carrier world:

• Verizon is locked in difficult negotiations for the purchase of Vodafone’s 45% share of the company. This is in a context where, two years ago, Vodafone made the decision to shed its participation in other carriers such as Orange, SFR or China Mobile. In their bid/ask conversations, Vodafone and Verizon are $30B apart, Verizon offering a mere $100B while Vodafone won’t take a penny less than $130B.
• Softbank and Dish Network are in a bidding war for Sprint, probably out of gluttony for more punishment. Masayoshi Son, Softbank’s leader, graciously spared us the carrier-as-victim lament. But if Dish Chairman Charlie Ergen prevails, we can be sure this seasoned sob story practitioner will fit right in once he becomes a cellular operator.

These are the people who tell us subsidies are killing them. They really do think we’re idiots.

– JLG@mondaynote.com

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Jawbone is launching is UP wristband in Europe. Beyond the quirky gadget lies a much larger project: Changing healthcare — for better or for worst. 

 Hyperkinetic as he is, Hosain Rahman, the Jawbone founder, must be saturating his Jawbone UP wristband with data. The rubberized band, nicely designed by Yves Behar, is filled with miniaturized electronics: accelerometers and sensors monitor your activity through out the day, recording every motion in your life, from walking in the street to the micro-movements of your hand in a paradoxical sleep phase. For the fitness freak, the Up is a great stimulus to sweat even more; for the rest of us, it’s more like an activity and sleep monitoring device. (For a complete product review, see this article from Engadget, and also watch Hosain Rahman’s interview by Kevin Rose, it’s well worth your time.) Last week in Paris, after my meeting with Hosain, I headed straight to the nearest Apple Store to pick-up my Up (for €129), with the goal of exploring my sleeping habits in greater depth.

After using the device for a couple of days, the app that comes with it tells me I’m stuck in a regime of 5 to 6 hours of bad sleep — including less than three hours of slow-wave sleep commonly known as deep sleep. Interesting: Two years ago, I spend 36 hours covered with electrodes and sensors in a hospital specializing in studying and (sometimes) treating insomnia — after a 6 months on a wait list to get the test. At one point, to monitor my sleep at home, doctors lent me a cumbersome wristband, the size of a matchbox. The conclusion was unsurprising: I was suffering from severe insomnia, and there was very little they could do about it. The whole sleep exploration process must have cost 3000€ to the French public health care system, 20 times more than the Jawbone gadget (or the ones that do a similar job). I’m not contending that medical monitoring performed by professionals can be matched by a wristband loaded with sensors purchased in an electronics store. But, aside from the cost, there is another key difference: the corpus of medical observations is based on classic clinical tests of a small number of patients. On the other hand, Jawbone thinks of the UP wristband — to be worn 24/7 by millions of people — in a Big Data frame of mind. Hosain Rahman is or will soon be right when he says his UP endeavor contributes to the largest sleep study ever done.

Then it gets interesting. As fun as they can be, existing wearable monitoring devices are in the stone age compared to what they will become in three to five years. When I offered Hosain a list of features that could be embedded in future versions of the UP wristband — such as a GPS module (for precise location, including altitude), heartbeat, blood pressure, skin temperature and acidity sensors, bluetooth transmitter — he simply smiled and conceded that my suggestions were not completely off-track. (Before going that far, Jawbone must solve the battery-life issue and most likely design its own, dedicated super-low consumption processor.) But Hosain also acknowledges his company is fueled by a much larger ambition than simply build a cool piece of hardware aimed at fitness enthusiasts or hypochondriacs.

His goal is nothing less than disrupting the healthcare system.

The VC firms backing Jawbone are on the same page. The funding calendar compiled by Crunchbase speaks for itself: out of the stunning $202m raised since 2007, most of it ($169m), has been raised since 2011, the year of the first iteration of the UP wristband (it was a failure due to major design flaws). All the big houses are on board: Khosla Ventures, Sequoia, Andreessen-Horowitz, Kleiner Perkins, Deutsche Telekom… They all came with an identical scheme in mind: a massive deployment of the monitoring wristband, a series of deals with the biggest healthcare companies in America to subsidize the device. All this could result in the largest health-related dataset ever build.

The next logical step would be the development of large statistical models based on customers’ recorded data. As far as privacy is concerned, no surprise: Jawbone is pretty straightforward and transparent: see their disclosure here. It collects everything: name, gender, size and weight, location (thanks to the IP address) and, of course, all the information gathered by the device, or entered by the user, such as the eating habits. A trove of information.

Big Data businesses focusing on health issues drool over what can be done with such a detailed dataset coming from, potentially, millions of people. Scores of predictive morbidity models can be built, from the most mundane — back pain correlated to sleep deprivation — to the most critical involving heart conditions linked to various lifestyle factors. When asked about privacy issues, Hosain Rahman insists on Jawbone’s obsessive protection of his customers, but he also acknowledges his company can build detailed population profiles and characterize various risk factors with substantially greater granularity.

This means serious business for the health care and insurance sectors — and equally serious concerns for citizens. Imagine, just for a minute, the impact of such data on the pricing structure of your beloved insurance company? What about your credit rating if you fall into a category at risk? Or simply your ability to get a job? Of course, the advent of predictive health models potentially benefits everyone. But, at this time, we don’t know if and how the benefits will outweigh the risks.

– frederic.filloux@mondaynote.com

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Getting rid of Samsung as a processor supplier and, at the same time, capturing the crown jewel of the American semiconductor industry. How could Apple resist the temptation to solve its cash problem and make history again?

Halfway through the second quarter of the 2013 fiscal year, most of Apple’s top execs meet at an undisclosed location (Eddy Cue’s chair is empty – he’s been called away to a Ferrari board meeting). They’re joined by a few trusted industry insiders: Bill “the Coach” Campbell, Apple and Intuit Director and adviser to Google’s founders, Mssrs. Page and Brin; Larry Sonsini, the Silicon Valley consigliere of more than three decades; and Frank Quattrone, the star investment banker with nine lives.

The meeting isn’t about the company’s dwindling profit margins. The smaller margins were expected and invited: The reduced-price iPad and heavy promotion of the “old” iPhone 4 as an entry-level product are part of the long term strategy of guarding Apple’s lower end (so to speak). And no whining about AAPL’s grim slide over the last six months, a problem that has only one solution: Apple needs to record a series of better quarters.

The problem of the day is, once again, what to do with Apple’s obscene pile of cash.

By the end of December 2012, the company held about $137B in cash (or equivalents such as marketable securities), including $23B from operations for the quarter.

CFO Peter Oppenheimer delivers the bad news: It looks like operations will disgorge another $35B this quarter. The stock buy-back and dividend program that was designed to bleed off $45B over the next few years (see this March 2012 Monday Note) won’t be enough if the company continues at this rate.

Apple needs something bigger.

Quattrone has been sitting quietly at the end of the table. He clears his throat and speaks:

Buy Intel.

Well, yes, Frank (says Tim Cook), we’ve been buying Intel processors for the Mac since 2005.

Not the chips. The company. The planets are aligned for Apple to strike a blow that will leave the industry forever changed. Make history, acquire Intel.

Quattrone has their attention. He unfolds the celestial calibration:

• Apple needs to extract itself from the toxic relationship with Samsung, its ARM supplier.
• Intel is the best large-scale silicon manufacturer in the world. They have the people, the technology, and the plant capacity to match Apple’s needs for years to come.
• “But Intel doesn’t do ARM!” you say. Indeed, Intel has no interest in the fierce competition and small margins in the ARM-based SoC market. Joining the ARM fray would severely disrupt Intel’s numbers and infuriate Wall Street. But if Intel were to essentially “go private” as Apple’s semiconductor manufacturing arm (pun intended), catering to all of Apple’s x86 and ARM needs (and whatever else Bob Mansfield is secretly plotting), Wall Street would have no such objection.
• Intel is flailing. The traditional PC market – Intel’s lifeblood – continues to shrink, yet the company does nothing to break into the ARM-dominated mobile sector. In the meantime, the company makes perplexing investments such as buying McAfee for $7.68B.
• There’s a leadership vacuum at Intel. Six months after announcing CEO Paul Otellini‘s “retirement”, Intel’s Board has yet to find a replacement who can sail the ship in more competitive waters. Apple could commission Pat Gelsinger, a 30-year Intel veteran and former CTO (Intel’s first) who fled to VMware after his career stalled at Intel. Despite being a bit of a Bill Gates look-alike (once upon a time), Gelsinger is a real technologist who would fit well within Apple, especially if he were given the opportunity to really “go for” the ARM architecture instead of iteratively tweaking x86 devices.
• Last but not least, Intel’s market cap is about $115B, eminently affordable. The company is profitable and generates a good deal of cash, even after the heavy capital expenditures required by its constant need to build new and expensive manufacturing plants.
• …oh, and one more thing: Wouldn’t it be fun to “partner” more closely with Microsoft, HP and Dell, working on x86 developments, schedules and… pricing?

A lively discussion ensues. Imagine solving many of Apple’s problems with a single sweeping motion. This would really make Cupertino the center of the high-tech world.

It’s an interesting idea, but there will be obstacles, both cultural and legal.

The Coach goes first: “Knowing both of these companies more than a little bit, I can attest to the pride they have in their respective cultures. They’re both disinclined to reconsider their beliefs in any meaningful way. Merging these two dissimilar groups, shedding unnecessary activities such as McAfee and the like would be dangerously disruptive to Apple’s well-honed, cohesive culture. As a general rule, merging two large organization rarely succeeds… unless you consider merging airlines a success…”

Finally, the Consigliere speaks: “It’s a tempting fantasy, it will mean years of work for my firm and many, many others, but as a friend of the company, as a past confidant of your departed Founder, don’t do it. There will be too much legal trouble with the Feds, with competitors, with Intel partners. Most fantasies aren’t meant to be enacted.”

I won’t dwell on the reality of the meeting: I made it up as a way to explain why Apple really has no choice other than submit to another cash phlebotomy, this time for an additional $60B. And, as with real-world phlebotomies, the procedure will treat the problem, but it won’t cure it. With $30B from operations per quarter, the $60B lancing will have to be repeated.

Some read the decision to return gobs of cash to shareholders as an admission of defeat. Apple has given up making big moves, as in one or more big acquisitions.

I don’t agree: We ought to be glad that the Apple execs (and their wise advisers) didn’t allow themselves to succumb to transaction fever, to a mirage of ego aggrandizement held out by a potential “game changing” acquisition.

A final word on taxes. To return the additional $60B (for a total of $100B when including the ongoing program announced last year) through increased dividends and repurchased shares, Apple will have to borrow money.

Borrow? When they have so much cash?

Yes, thanks to our mangled tax code. As explained here, about $100B of Apple’s cash is stored overseas. If repatriated, it would be “heavily” (read “normally”) taxed. Like most US companies that have international operations, Apple plays complicated, entirely legal tax games that allow their international profits to be taxed at very low rates as long as the profits — and the resulting cash — stay outside Uncle Sam’s reach. And thus we have the apparent paradox of borrowing money when cash-rich.

The benefit of these tax code contortions is difficult to explain to normal humans — as opposed to legislators who allowed the loopholes.

All this now makes Apple a different company. Once a fledgling challenger of established powerhouses such as IBM, Microsoft or HP, it now makes “too much cash” and is condemned to a life of paying dividends and buying back shares — like the old fogies it once derided.

– JLG@mondaynote.com

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In the search for new advertising models, Native Ads are booming. The ensuing Web vs. Native controversy is a festival of fake naïveté and misplaced indignation. 

Native Advertising is the politically correct term for Advertorial, period. Or rather, it’s an upgrade, the digital version of an old practice dating back to the era of typewriters and lead printing presses. Everyone who’s been in the publishing business long enough has in mind the tug-of-war with the sales department who always wants its ads to to appear next to an editorial content that will provide good “context”. This makes the whole “new” debate about Native Ads quite amusing. The magazine sector (more than newspapers), always referred to “clean” and “tainted” sections. (The latter kept expanding over the years). In consumer and lifestyle sections, editorial content produced by the newsroom is often tailored to fit surrounding ads (or to flatter a brand that will buy legit placements).

The digital era pushes the trend several steps further. Today, legacy media brands such as Forbes, Atlantic Media, or the Washington Post have joined the Native Ads bandwagon. Forbes even became the poster child for that business, thanks to the completely assumed approach carried out by its chief product officer Lewis DVorkin (see his insightful blog and also this panel at the recent Paid Content Live conference.) Advertising is not the only way DVorkin has revamped Forbes. Last week, Les Echos (the business daily that’s part of the media group I work for) ran an interesting piece about it titled “The Old Press in a Startup mode” (La vielle presse en mode start-up). It details the decisive — and successful — moves by the century-old media house: a downsized newsroom, external contributors (by the thousand, and mostly unpaid) who produce a huge stream of 400 to 500 pieces a day. “In some cases”, wrote Lucie Robequain, Les Echos’s New York correspondent, “the boundary between journalism and advertorial can be thin…” To which Lewis DVorkin retorts: “Frankly, do you think a newspaper that conveys corporate voices is more noble? At Forbes, at least, we are transparent: We know which company the contributor works for and we expose potentials conflicts of interests in the first graph…” Maybe. But screening a thousand contributors sounds a bit challenging to me… And Forbes evidently exposed itself as part of the “sold” blogosphere. Les Echos’ piece also quotes Joshua Benton from Harvard’s Nieman Journalism Lab who finds the bulk of Forbes production to be, on average, not as good as it was earlier, but concedes the top 10% is actually better…

As for Native Advertising, two years ago, Forbes industrialized the concept by creating BrandVoice. Here is the official definition:

Forbes BrandVoice allows marketers to connect directly with the Forbes audience by enabling them to create content – and participate in the conversation – on the Forbes digital publishing platform. Each BrandVoice is written, edited and produced by the marketer.

Practically, Forbes lets marketers use the site’s Content Management System (CMS) to create their content at will. The commercial deal — from what we can learn — involves volumes and placements that cause the rate to vary between $50,000 to $100,000 per month. The package can also include traditional banners that will send traffic back to the BrandVoice page.

At any given moment, there are about 16 brands running on Forbes’ “Voices”. This revenue stream was a significant contributor to the publisher’s financial performances. According to AdWeek (emphasis mine):

The company achieved its best financial performance in five years in 2012, according to a memo released this morning by Forbes Media CEO Mike Perlis. Digital ad revenue, which increased 19 percent year over year, accounted for half of the company’s total ad revenue for the year, said Perlis. Ten percent of total revenue came from advertisers who incorporated BrandVoice into their buys, and by the end of this year, that share is estimated to rise to 25 percent.

Things seemed pretty positive across other areas of Forbes’ business as well. Newsstand sales and ad pages were up 2 percent and 4 percent, respectively, amid industry-wide drops in both areas. The relatively new tablet app recently broke 200,000 downloads.

A closer look gives a slightly bleaker picture: According to latest data from the Magazine Publishers Association, between Q1 2013 and Q1 2012, Forbes Magazine (the print version only) lost 16% in ads revenues ($50m to $42m). By comparison, Fast Company scored +25%, Fortune +7%, but The Economist -27% and Bloomberg Business Week -30%. The titles compiled by the MPA are stable (+0.5%).

I almost never click on banners (except to see if they work as expected on the sites and apps I’m in charge of). Most of the time their design sucks, terribly so, and the underlying content is usually below grade. However, if the subject appeals to me, I will click on Native Ads or brand contents. I’ll read it like another story, knowing full well it’s a promotional material. The big difference between a crude ad and a content-based one is the storytelling dimension. Fact is: Every company has great stories to tell about its products, strategy or vision. And I don’t see why they shouldn’t be told  resorting to the same storytelling tools news media use. As long as it’s done properly, with a label explaining the contents’ origin, I don’t see the problem (for more on this question, read a previous Monday Note: The Insidious Power of Brand Content.) In my view, Forbes does blur the line a bit too much, but Atlantic’s business site Quartz is doing fine in that regard. With the required precautions, I’m certain Native Ads, or branded contents are a potent way to go, especially when considering the alarming state of other forms of digital ads. Click-through rates are much better (2%-5% vs. a fraction of a percentage for a dumb banner) and the connection to social medias works reasonably well.

For news media companies obsessed with their journalistic integrity (some still do…), the development of such new formats makes things more  complicated when it comes to decide what’s acceptable and what’s not. Ultimately, the editor should call the shots. Which brings us to the governance of media companies. For digital media, the pervasive advertising pressure is likely keep growing. Today, most rely on a Chief Revenue Officer to decide what’s best for the bottom line such as balancing circulation and advertising, arbitraging between a large audience/low yield or smaller audience/higher yield, for instance. But, in the end, only the editor must be held accountable for the contents’ quality and the credibility — which contribute to the commercial worthiness of the media. Especially in the digital field, editors should be shielded from the business pressure. Editors should be selected by CEOs and appointed by boards or better, boards of trustees. Independence will become increasingly scarce.

– frederic.filloux@mondaynote.com

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Apple does the right thing when striving to keep its App Store free from promotional trickery – but fails to shed light on the process and, as a result, damages its reputation.

Earlier this month, the Apple App Store removed the popular AppGratis application from its shelves. Then, last week, the App Store censors delivered a decisive blow by suppressing AppGratis’ push notifications to installed apps.
Apple’s reason for the ban: “… the app circumvented App Store rules preventing applications promoting other apps and direct marketing.”

AppGratis CEO Simon Dawlat took to the airwaves, loudly protesting his innocence. The aggrieved entrepreneur criticized Apple’s arbitrary and inconsistent approval process and “out of the blue” removal of AppGratis. He launched an online petition that gathered 571K signatures in just a few hours. He convinced Fleur Pellerin, France’s Minister of Digital Technologies, to run to the wounded company’s bedside and join the protest. Minister Pellerin added a bit of saber-rattling, calling Apple’s actions “brutal” and hinting at plans to ask the EU to examine the takedown.

But then the PR tide turned. An AppGratis document leaked to Business Insider by a “source in the developer community” hints at the company’s unspoken business model: AppGratis will raise your app’s rating in the App Store – for a fee.

Specifically, AppGratis gives developers an estimate of where in Apple’s App Store rankings an App can land based on how much the developer is willing to pay… [The] document shows AppGratis estimates a ~$300,000 buy will land an app in the top five slot in the US version of the App Store.

$300k is a lot of money for a small app developer, but the promise is that the higher ranking will result in increased revenue that will more than cover AppGratis’ “service fee”.

Before the e-dust could settle, Dawlat posted a long-winded blog entry that I assume was meant as a rebuttal. Here’s an excerpt:

People have “accused us” of gaming the top. But the reality is that with or without the “rankings,” our community will still drive millions of installs for the apps we feature. Independently from the App Store. We have never based our business on ranking exposure, because we’ve always expected Apple to chime in at some point, and change that. 

He then went on to announce AppGratis’ “crazy cool” old-yet-new direction [emphasis mine]:

And even more exciting, we’re back to our roots. A crazy cool daily newsletter with millions of subscribers, that will very soon be complemented by the newest and nicest HTML5 WebApp you’ll ever see. Two things we fully own, and that no one can take away from us. So when I stated a week ago that the reports of our death were greatly exaggerated, I wasn’t kidding. Not kidding at all. AppGratis is just getting started.
Because from the bottom of our hearts, we know we add value to this whole ecosystem.
And we intend to keep doing just that.

To shed light on this complicated situation, let’s use an analogy. And since this about a French company, Apple will be represented by Carrefour, the hypermarché giant — something like Walmart, but less polite. If you ask to have your groceries packed up, the cashier throws a plastic bag at you and tells you to do it yourself. You’ll be playing Simon Dawlat.

You approach Carrefour with your unique line of heirloom yogurts made from free range goat milk. It’s an interesting product, but is Carrefour obligated to give you shelf space? Of course not. The store may be inelegant and the staff is rude, but the company has its standards. Carrefour offers to take you on if you agree to its rules concerning shelf displays and promotional activities.

One day, a store manager notices the coupons you’ve enclosed in your yogurt packs. These coupons promote other products that Carrefour stocks, offered at lower prices when purchased on-line. When asked about it, you finally admit that, yes, some of the other manufacturers pay you to include their coupons with your yogurt. Carrefour management throws a plastic bag at you and tells you to pack up and go home. Their store, their rules.

(The analogy is both transparent and flawed. There’s no perfect physical retail analogue for AppGratis’ virtual schtick — getting paid to bubble an app up the App Store rankings. And the App Store doesn’t have a great real-world analogue, either. The App Store’s raison d’être is to make iPhone and iPads more valuable; it’s not a business in itself. But you get the idea.)

To touch on the obvious, Apple isn’t obligated to publish AppGratis or any other app, regardless of a developer’s adherence to the rules.

As for the rules themselves, I read through the App Store Review Guidelines, bracing myself for Apple’s usual hauteur. What I found was a personable, (mostly) well-written document that addresses a number of complicated issues while (mostly) avoiding the opaque legalese found in the licensing agreements we all stopped reading long ago.

The rule that’s most pertinent to the AppGratis case is this [emphasis mine]:

If you attempt to cheat the system (for example, by trying to trick the review process, steal data from users, copy another developer’s work, or manipulate the ratings) your Apps will be removed from the store and you will be expelled from the developer program.

There seems little doubt that AppGratis crossed this line: Its business model is precisely one of artificially enhancing an app’s ratings.

This isn’t a new issue. In September 2012, Apple added a clause (section 2.25) to the Guidelines:

Apps that display Apps other than your own for purchase or promotion in a manner similar to or confusing with the App Store will be rejected.

A good deal of discussion ensued, most of which made clear what awaited AppGratis and others such as FreeAppADay, AppoDay, Daily App Dream, and App Shopper. As explained in a PocketGamer post [emphasis mine]:

The wording is typically vague, but clause 2.25 appears to give Apple carte blanche to put any app that promotes titles from a different developer out of action.
At the moment, we understand Apple’s likely prime targets are pure app promotion services, such as (but not necessarily including) FreeAppADay, AppoDay, AppGratis, Daily App Dream and AppShopper, amongst others.

That clause 2.25 was introduced more than six months ago puts Dawlat’s claim that Apple acted “out of the blue” and Minister Pellerin’s accusation of “brutality” in a different light: Dawlat had ample notice of Apple’s intent.

(Minister Pellerin might now be wondering if her staff performed sufficient research before letting her run to Dawlat’s rescue…or maybe not. Half-baked technopolicy is becoming politics-as-usual in France. Last year, the newly-elected government ran afoul of high-tech entrepreneurs when it announced legislation that would greatly increase taxes on their equity gains, only to beat a hasty half-retreat, leaving the tax question muddier than ever. Perhaps the AppGratis snafu was perceived as an opportunity to earn back some of the lost credit, especially when portraying the situation as a French David vs. an American Goliath.)

Ultimately, Dawlat’s cry of foul will probably be seen as disingenuous and tiresome, not to mention a wasteful distraction… Do the critics of the App Store approval process consider the noise level that approvers must endure? To get to the current 700,000 apps, the company has to scrutinize more than 3,000 new entries a week plus revisions of existing apps. Mistakes will be made. Some apps will be approved only to be yanked when their scheme becomes obvious. Developers will be incensed, and Apple, sensibly, has anticipated the backlash:

If your app is rejected, we have a Review Board that you can appeal to. If you run to the press and trash us, it never helps.

So it’s case closed, right?

Not quite. There remains the problem of perception.

I can’t provide a link to the Guidelines in this Note because the document is only accessible to dues-paying developers (of which I am one). There’s nothing mysterious, secret, or dangerous about these words, they provide no competitive insight that could work to Apple’s disadvantage. Charging a developer just to read the rules gains nothing, and contributes to Apple’s negative image. Attempting to keep them out of the public eye is insulting and futile – developers freely leak and comment on the content.

Far worse is that Apple appears to have a policy (with very few allowances) of refusing to publicly explain its App Store decisions. I realize that some judgments are ineffable, matters of taste, as explained in the Guidelines:

We will reject Apps for any content or behavior that we believe is over the line. What line, you ask? Well, as a Supreme Court Justice once said, “I’ll know it when I see it”. And we think that you will also know it when you cross it.

Apple isn’t wrong to reserve the right to make such decisions. Although insiders may depict the company as obsessive control freaks, “normal” customers seem to appreciate Apple’s efforts to keep the App Store a Clean, Well-Lighted Place.

But maintaining a stony silence when imposing a judgment call is a bad choice, it distances developers, and it inevitably triggers controversy. A few words of explanation would invite respect for having courageously taken a difficult stance.

As already discussed in a recent Monday Note (Apple is Losing The War – Of Words), I find the company’s refusal to engage in more public debate harmful and disrespectful. While the AppGratis incident in itself isn’t overly important, it could be an opportunity for Apple to reconsider its ways.

– JLG@mondaynote.com

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The small Baltic republic of Estonia is run like a corporation. But its president believes government must to play a crucial role in areas of digital policy such as secure ID. 

Toomas Hendrik Ilves must feel one-of-a-kind when he attends international summits. His personal trajectory has nothing in common with the backgrounds of other heads of state. Born in Stockholm in 1953 where his parents had taken refuge from the Soviet-controlled Estonia, Ilves was raised mostly in the United States. There, he got a bachelor’s degree in psychology from Columbia University and a master’s degree in the same subject from the University of Pennsylvania. In 1991, when Estonia became independent, Ilves was in Munich, working as a journalist for Radio Free Europe (he is also fluent English, German and Latin.) Two years later, he was appointed ambassador to — where else? — the United States. In 2006, a centrist coalition elected him president of the republic of Estonia (1.4m inhabitants).

One more thing about Toomas Hendrik Ilves: he programmed his first computer at the age of 13. A skill that would prove decisive for his country’s fate.

Last week in Paris, president Ilves was the keynote speaker at a conference organized by Jouve Group, a 3,000 employees French company specialized in digital distribution. The bow-tied Estonian captivated the audience with his straight speech, the polar opposite of the classic politician’s. Here are abstracts from my notes:

“At the [post-independence] time, the country, plagued by corruption, was rather technologically backward. To give an example, the phone system in the capital [Tallinn] dated back to 1938. One of our first key decisions was to go for the latest digital technologies instead of being encumbered by analog ones. For instance, Finland offered to provide Estonia with much more modern telecommunication switching systems, but still based on analog technology. We declined, and elected instead to buy the latest digital network equipment”.  

Estonia’s ability to build a completely new infrastructure without being dragged down by technologies from the past (and by the old-guard defending it) was essential to the nation’s development. When I later asked him about the main resistance factors he had encountered, he mentioned legacy technologies: “You in France, almost invented the internet with the Minitel. Unfortunately, you were still pushing the Minitel when Mosaic [the first web browser] was invented”. (The videotext-based system was officially retired at last in… 2012. France lost almost a decade by delaying its embrace of Internet Protocols.)

The other key decision was introducing computers in schools and teaching programming on a large scale. Combined to the hunger for openness in a tiny country emerging from 45 years of Soviet domination, this explains why Estonia has become an energetic tech incubator, nurturing big names like Kazaa or Skype (Skype still maintains its R&D center in Tallinn.)

“Every municipality in Estonia wanted to be connected to the Internet, even when officials didn’t know what it was. (…) And we played with envy…. With neighbors such as Finland or Sweden, the countries of Nokia and Ericsson, we wanted to be like them.”  

To further encourage the transition to digital, cities opened Internet centers to give access to people who couldn’t afford computers. If, in Western Europe, the Internet was seen as a prime vector of American imperialism, up in the newly freed Baltic states, it was seen as an instrument of empowerment and access to the world:

“We wanted a take the leap forward and build a modern country from the outset. The first public service we chose to go digital was the tax system. As a result, not only we eliminate corruption in the tax collection system — a computer is difficult to bribe –, but we increased the amount of money the state collected. We put some incentives in: When filing digitally, you’d get your tax refund within two weeks versus several months with paper. Today, more than 95% of tax returns are filed electronically. And the fact that we got more money overcame most of the resistance in the administration and paved the way for future developments”. 

“At some point we decided to give to every citizen a chip-card… In other words, a digital ID card. When I first mentioned this to some Anglo-saxon government officials, they opposed the classic ”Big Brother” argument. Our belief was, if we really wanted to build a digital nation, the government had to be the guarantor of digital authentication by providing everyone with a secure ID. It’s the government’s responsibility to ensure that someone who connects to an online service is the right person. All was built on the public key-private key encryption system. In Estonia, digital ID is a legal signature.The issue of secure ID is essential, otherwise we’ll end-up stealing from ourselves. Big brother is not the State, Big Brother lies in Big Data.”

“In Estonia, every citizen owns his or her data and has full access to it. We currently have about 350 major services securely accessible online. A patient, never gets a paper prescription; the doctor will load the prescription in a the card and the patient can go to any pharmacy. The system will soon be extended to Sweden, Denmark, Finland, Norway, as our citizens travel a lot. In addition, everyone can access their medical records. But they can chose what doctor will see them. I was actually quite surprised when a head of State from Southern Europe told me some paper medical records bear the mention “not to be shown to the patient” [I suspect it was France...]. As for privacy protection, the ID chip-card works both ways. If a policeman wants to check on your boyfriend outside the boundaries of a legal investigation, the system will flag it — it actually happened.” 

As the Estonian president explained, some good decisions also come out of pure serendipity,:

“[In the Nineties], Estonia had the will but not all the financial resources to build all the infrastructure it wanted, such as massive centralized data centers. Instead, the choice was to interconnect in the most secure way all the existing government databases. The result has been a highly decentralized network of government servers that prevent most abuses. Again, the citizen can access his health records, his tax records, the DMV [Department of Motor Vehicles], but none of the respective employees can connect to another database”.

The former Soviet Union had the small Baltic state pay the hard price for its freedom. In that respect, I recommend reading CyberWar by Richard Clarke, a former cyber-security advisor in the Clinton administration, who describes multiple cyber-attacks suffered by Estonia in 2007. These actually helped the country develop skillful specialists in that field. Since 2008, Tallinn harbors NATO’s cyber defense main center in addition to a EU large-scale IT systems center.

Toomas Hendrik Ilves stressed the importance of cyber-defense, both at the public and private sector level:

“Vulnerability to a cyber attacks must be seen as a complete market failure. It is completely unacceptable for a credit card company to deduct theft from its revenue base, or for a water supply company to invoke cyber attack as a force majeure. It is their responsibility to protect their systems and their customers. (…) Every company should be aware of this, otherwise we’ll see all our intellectual property ending up in China”. 

–frederic.filloux@mondaynote.com

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Pervasive sensors and IP connections, coupled with the “infinite” storage and computing power in the Cloud, threaten our privacy. We need to defend ourselves and get control of our personal data amassed by private companies and government agencies.

Optimists and pessimists may inhabit opposing camps, but they do have one thing in common: Their inclinations lead to behaviors that verify their prophecies. I’ve chosen my side: I’m an optimist and have been rewarded accordingly. As a reminder of my attitude, to make sure that the occasional frustrations don’t derail my determination, I keep a little figurine from the Provençal Crèche (Nativity Scene) on my desk. He’s called Lou Ravi, the Enraptured One:

The traditional characterization is that of a gent who wanders the world, innocently marveling at the simplest of miracles. (At times, I wonder if he isn’t just a polite version of the village idiot.)

Recently, a seemingly trivial incident cast a shadow over my life-long optimism, an event that awakened dark thoughts about technology’s impact on our privacy.

As I’m driving on the A10 not-so-freeway towards the Loire châteaux, I see my license plate displayed on a sign that tells me that I’m exceeding the speed limit (130kph, about 80mph). This is novel… where we used to have an anonymous flashing nag, now we’re individually fingered. On the one hand, it’s certainly more helpful than a broad, impersonal warning; on the other, it’s now personal.

Stirred from my enraptured stupor, I start counting other ways in which we’re targeted.

Staying within the realm of license plates, we have an official, Wikipedia-sanctioned acronym: ALPR, the Automatic License Plate Reader, a device that’s used (or mis-used) by municipalities to scan every vehicle that enters the city’s limits. An ALPR system is already operational in ritzy Tiburon just north of the Golden Gate Bridge, and it’s being considered in ritzier Piedmont, an island of wealth surrounded by Oakland. The NYPD has used mobile license plate readers to build a “database of 16 million license plates, along with locations where the car was spotted”. (A Google search for Automatic License Plate Reader yields more than 1M hits.)

We also have various flavors of “event data recorders” in our cars. Similar to a plane’s black box, an EDR can regurgitate the sequence of events that preceded a crash. According to the NHTSA (National Highway Traffic Safety Administration), 96% of all 2013 vehicles carry such a device and there is a proposal to make them mandatory in 2015 models.

Insurance companies see the EDR as an opportunity to better evaluate risk so they can offer lower premiums to good drivers. Privacy advocates are concerned that the data could be used for less benevolent purposes:

Though the information is being collected with the best of intentions – safer cars or to provide drivers with more services and conveniences – there is always the danger it can end up in lawsuits, or in the hands of the government or with marketers looking to drum up business from passing motorists.

Again, if you Google “car black box recorder”, you get about 6M hits and a wide range of third-party devices. Some come with a dashboard camera such as we see in American patrol cars (and that have been adopted by a huge number of Russian drivers); others plug into the OBD-II (On-Board Diagnostic) connector that’s present on all modern cars. Combined with accelerometers and precision GPS recording, these draw a very accurate picture of everything we do at the wheel, where, when and how.

It’s not all sinister: With appropriate software, weekend track drivers can visualize and analyze their braking, acceleration, and effective use of apexes. Still, the overall picture is one of omnipresent surveillance. And I’m certainly not encouraged when I read that “anyone with a handheld scanner and access to the port under your steering column can download a wealth of information about your vehicle.”

The regard for privacy that’s demonstrated by the public sector — the government agencies that can have an enormous impact on our lives — is also less than encouraging. We now realize that the IRS reads our email without requiring any authorization or judicial supervision; the DEA complains about iMessage encryption; we have National Security Letters that confer broad and little-supervised snooping powers to US government agencies.

On the private side, Google, Facebook, and cellular carriers amass and trade on our personal data, again, with little or no practical oversight. Try asking any of these companies what sort of information they have on you, to whom they sell it, and if you can have a peek at it.

The litany goes on: Escalating healthcare expenditures give insurers equally escalating incentives to acquire personal behavior data in order to improve their risk calculation (and reject claims). We’re photographed, videoed, and, now, face-recognized everywhere. Try counting the cameras that see you on the street, in stores, elevators, offices.

When we worry about such practices, we get the sort of rote retort infelicitously typified by Eric Schmidt: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”

Sure, if you have nothing to hide, you have nothing to fear. All you need to do is lead a pristine life. Drive carefully; wait for the green light before you cross the street; eat a balanced diet; don’t take, view, or exchange the wrong pictures; don’t consort with undesirable people; don’t say or write bad words; don’t inhale the wrong smoke…

This is unrealistic.

If there is nowhere to hide, how can disagreements safely ferment in political life, at work, in relationships? By definition, change disturbs something or annoys someone. And, moving to paranoia, or full awareness, the age-old question arises: Who will guard us from the guardians?

Returning to my now slightly-strained optimism, I hope we’ll support the people and organizations, such as the ACLU and many others, who work for our privacy, and that we’ll use our votes to unseat those who sell us out to private and state encroachers. We can start with demanding a handle on who has what data on us. Playing on Habeas Corpus, it’s already called Habeas Data.

I’m curious to see what Google, Verizon, Orange, Facebook, Amazon and many others know about me. Insights await…

– JLG@mondaynote.com

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The Norwegian media group Schibsted now aggressively invests in startups. The goal: digital dominance, one market at a time. France is in next in line. Here is a look at their strategy. 

This thought haunts most media executives’ sleepless nights: “My legacy business is taking a hit from the internet; my digital conversion is basically on track, but it goes with an massive value destruction. We need both a growth engine and consolidation. How do we achieve this? What are our core assets to build upon? Should we undertake a major diversification that could benefit from our brand and know-how?” (At that moment, the buzzer goes off, it’s time to go to work.) Actually, such nighttime cogitations are a good sign, they are the privilege of people gifted with long term view.

The Scandinavian media power house Schibsted ASA falls into the long-termist category.  Key FY 2012 data follow. Revenue: 15bn Norwegian Kroner (€2bn or $2.6bn.); EBIT: 13.5%. The group currently employs 7800 people spread over 29 countries. 40% of the revenue and 69% of the EBITDA come from online activities. Online classifieds account for 25% of revenue and 52% of the EBITDA; the rest in publishing. (The usual disclosure: I worked for Schibsted between 2007 and 2009, in the international division).

The company went through the delicate transition to digital about five years ahead of other media conglomerates in the Western world. To be fair, Schibsted enjoyed unique conditions: profitable print assets, huge penetration in small Nordic markets immune to foreign players, a solid grasp of all components of the business, from copy sales to subscribers for newspapers and magazines, to advertising and distribution channels. In addition, the group enjoys a stable ownership structure (controlled by a trust), and its board always encourages the management to aim high and take risks. The company is led by a lean team: only 60 people at the Oslo headquarters to oversee the entire operations, largely staffed by McKinsey alumni.

The transition began in 1995 when Schibsted came to realize the media sector’s center of gravity would inevitably shift to digital. The move could be progressive for reading habits but it would definitely be swift and hard for critical revenue streams such as classifieds and consumer services. Hence the unofficial motto that’s still remains at the core of Schibsted’s strategy: Accelerating the inevitable (before the inevitable falls on us). Such view led to speeding up the demise of print classifieds, for instance, in order to free oxygen for emerging digital products. Not exactly popular at the time but, thanks to methodical pedagogy, the transition went well.

One after the other, business units moved to digital. Then, the dot-com crash hit. In Norway and Sweden, Schibsted media properties where largely deployed online with large dedicated newsrooms, emerging consumer services built from scratch or from acquisitions. Management wondered what to do: Should we opt for a quick and massive downsizing to offset a brutal 50% drop in advertising revenue? Schibsted took the opposite tack: Yes business is terrible, but this is mostly the result of the financial crisis; the audience is still here, not only it won’t go away but, eventually, it will experience huge growth. This was the basis for two key decisions: Pursuing investments in digital journalism while finding ways to monetize it; and doing whatever it took in order to dominate the classifieds business.

In Sweden, a bright spot kept blinking on Schibsted’s radar. Blocket was growing like crazy. It was a bare-bone classifieds website, offering a mixture of free and premium ads in the simplest and most efficient way. At first, Schibsted Sweden tried to replicate Blocket’s model with the goal of killing it. After all, the group thought, it had all the media firepower needed to lift any brand… Wrong. After a while, it turned out Schibsted’s copycat  still lagged behind the original. In the kind of pragmatism allowed by deep pockets, Schibsted decided to acquire Blocket (for a hefty price). The clever classifieds website will become the matrix for the group’s foray in global classifieds.

In 2006, Schibsted had acquired and developed a cluster of consumer-oriented websites, from Yellow-Pages-like directories, to price-comparisons sites, or consumer-data services. Until then, the whole assemblage had been built on pure opportunism. It was time to put things in order. Hence, in 2007, the creation of Tillväxmedier, the first iteration of Schibsted Development. (The Norwegian version was launched in 2010 and the French one starts this year).

Last week in Paris, I met Richard Sandenskog, Tillväxmedier’s investment manager and Marc Brandsma, the newly appointed CEO of Schibsted Development France. Sandenskog is a former journalist who also spent eight years in London as a product manager for Yahoo!  Brandsma is a seasoned French entrepreneur and former venture capitalist. Despite local particularisms precluding a dumb replication of Nordic successes, two basics principles remain:

1. Invest in the number one in a niche market, or a potential number one in a larger one. “In the online business, there is no room for number two”, said Richard Sandenskog. “We want to leverage our dominance on a given market to build brands and drive traffic. The goal is to find the best way to expose the new brand in different channels and integrate it in various properties. The keyword is relevant traffic. We don’t care for page views for their sake, but for the value they bring. We see clicks as a currency.”

2. Picking the right product in the right sector. In Sweden, the Schibsted Developement portfolio evolves around the idea of empowering the consumer. To sum up: people are increasingly lost in a jungle of pricing, plans, offers, deals, for the services they need. It could be cell phones, energy bills, consumer loans… Hence a pattern for acquisitions: a bulk purchase web site for electricity (the Swedish market is largely deregulated with about 100 utilities companies); a helper to find the best cellular carrier plan based on individual usage; a personal finance site that lets consumers shop around for the best loan without degrading their credit rating; a personal factoring service where anyone can auction off invoices, etc.
Most are now #1 on their segment. “We give the power back to the consumer, sums up Richard Sandenskog. We are like Mother Teresa but we make money doing it….” Altogether, Tillväxmedier’s portfolio encompasses about 20 companies that made a billion of Swedish Kröner (€120m, $155m) in 2012 with a 12% EBITDA (several companies are in the growth phase.) All in five years…

France will be a different story. It’s five times bigger than Sweden, a market in which startups can be expensive. But what triggered Schibsted ASA’s decision to create a growth vehicle here is the spectacular performance of the classifieds site LeBoncoin.fr (see a previous Monday Note Schibsted’s extraordinary click machines): €98m in revenue and a cool 68% EBITDA last year. LeBoncoin draws 17m unique viewers (according to Nielsen). Based on this valuable asset, explains Marc Brandsma, the goal is to create the #1 online group in France (besides Facebook and Google). “The typical players we are looking for are B2C companies that already have a proven product — we won’t invest in PowerPoint presentations — driven by a management team aiming to be the leader in their market. Then we acquire it; we buy out all minority shareholders if necessary”. No kolkhoz here; decisions must be made quickly, without interference. “At that point, adds Brandsma we tell managers we’ll take care of growth by providing traffic, brand notoriety, marketing, all based on best practices and proven Schibsted expertise”. Two sectors Marc Brandsma says he won’t touch, though: business-to-business services and news media (ouch…)

– frederic.filloux@mondaynote.com

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Facebook’s new Home on Android smartphone is an audacious attempt to demote the OS to a utility role, to keep to itself user data Android was supposed to feed into Google’s advertising business. Google’s reaction will be worth watching.

Amazon’s Kindle Fire, announced late September 2011, is viewed as a clever “Android lock pick“. Notwithstanding the term’s illicit flavor, Amazon’s burglary is entirely legal, an intended consequence of Google’s decision to Open Source their Android mobile operating system. Download the Android source code here, modify it to your heart’s — or business needs’ — content, load it onto a device and sell as many as you’d like.

Because it doesn’t fully meet the terms of the Android Compatibility Program, Amazon’s proprietary version isn’t allowed to use the Android trademark and the company had to open its own App Store. In industry argot, Amazon “forked” Android; they spawned an incompatible branch in the Android Source Tree.

The result of this heretic version of Android is a platform that’s tuned to Amazon’s own needs: Promoting its e-commerce without feeding Google’s advertising money pump.

And that brings us to Facebook’s new Home.

(The company’s slick presentation is here. Business Insider’s also provides a helpful gallery.)

Zuckerberg’s new creation is the latest instance of the noble pursuit of making the user’s life easier by wrapping a shell around existing software. Creating a shell isn’t a shallow endeavor; Windows started its life as a GUI shell wrapped around MS-DOS.  Even venerable Unix command line interfaces such as C shell, Bourne, and Bash (which can be found inside OS X) are user-friendly — or “somewhat friendlier” — wrappers around the Unix kernel. (Sometimes this noble pursuit is taken too far — remember Microsoft’s Bob? It was the source of many jokes.)

Facebook Home is a shell wrapped around Android; it’s a software layer that sits on top of everything else on your smartphone. Your Facebook friends, your timeline, conversations, everything is in one place. It also gives you a simple, clean way to get to other applications should you feel the need to leave the Facebook corral… but the intent is clear: Why would you ever want to leave Home?

This is audacious and clever, everything we’ve come to expect from the company’s founder.

To start with, and contrary to the speculation leading up to the announcement, Facebook didn’t unveil a piece of hardware. Why bother with design, manufacture, distribution and support, only to sell a few million devices — a tiny fraction of your one billion users — when you can sneak in and take over a much larger number of Android smartphones at a much smaller cost?

Second, Home is not only well-aligned with Facebook’s real business, advertising revenue, it’s even more aligned with an important part of the company’s business strategy: keeping that revenue out of Google’s hands. Android’s only raison d’être is to attract a captive audience, to offer free services (search, email, maps…) in order to gain access to the users’ actions and data, which Google then cashes in by selling eyeballs to advertisers. By “floating” above Android, Home can keep these actions and data to itself, out of Google’s reach.

Facebook, like Amazon, wants to keep control of its core business. But unlike Amazon, Facebook didn’t “fork” Android, it merely demoted it to an OS layer that sits underneath the Home shell.

On paper and in the demos, it sounds like Zuckerberg has run the table… but moving from concept to reality complicates matters.

First, Facebook Home isn’t the only Android shell. An important example is Samsung, the leading Android player: it provides its own TouchWiz UI. Given that the Korean giant is obviously determined to stay in control of its own core business, one wonders how the company will welcome Facebook Home into the family of Galaxy phones and phablets. Will it be a warm embrace, or will Samsung continually modify its software in order to keep Home one step behind?

More generally, Facebook has admitted that differences in Android implementations prevent the first release of Home from working on all Android phones. In order to achieve the coverage they’ll need to keep Google (and its Google+ social networking effort) at bay, Facebook could be sucked into a quagmire of development and support.

Last but not least, there’s Google’s reaction.

So far, we’ve heard little but mellifluous pablum from Google in response to Home. (Microsoft, on the other hand, quickly attempted to point out that they were first with an all-your-activities-friends-communications shell in Windows Phone but, in this game, Android is the new Windows and Microsoft is the Apple of the early 90′s.)

Google has shown that it can play nice with its competitors — as long as they aren’t actually competing on the same turf. The Mountain View company doesn’t mind making substantial ($1B or more) Traffic Acquisition payments to Apple because the two don’t compete in the Search and Advertising business. Facebook taking over an Android smartphone is another matter entirely. Google and Facebook are in the same game; they both crave access to user data.

Google could sit back and observe for a while, quantify Facebook’s actual takeover of Android phones, keep tabs on users’ reactions. Perhaps Home will be perceived as yet another walled garden with a massive handover of private data to Facebook.

But Google already sees trouble for its Android strategy.

Many Asian handset makers now adopt Android without including services such as Google Search, Gmail, and Google Maps, the all-important user data pumps. Samsung still uses many of these services but, having gained a leading role on the Android platform, it might demand more money for the user data it feeds to Google, or even fork the code.

In this context, Facebook Home could be perceived as yet another threat to the Android business model.

A number of possible responses come to mind.

In the computer industry, being annoyed or worse by “compatible” hardware or software isn’t new. As a result, the responses are well honed. You can keep changing the interface, thus making it difficult for the parasitic product to bite into its host and suck its blood (data, in this case), or you change the licensing terms.

Google could change or hide its APIs (Application Programming Interfaces) in order to limit Home’s functionality, or even prevent it from running at all (at least until a particularly nasty “bug” is fixed). Worse, Google could makes changes that cause the Facebook shell to still run, but poorly.

I’ll hasten to say that I doubt Google would do any of this deliberately — it would violate the company’s Don’t Be Evil ethos. But… accidents could happen, such as when a hapless Google engineer mistakenly captured Wifi data.

Seriously, FaceBook Home is yet another pick of the Android lock, a threat against Google’s core strategy that will have to be addressed, either with specific countermeasures or with more global changes in the platform’s monetization.

– JLG@mondaynote.com

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Publishers are concerned: The shift to mobile advertising revenue is lagging way behind the transfer of users to smartphones and tablets. Solutions are coming, but it might take a while before mobile ads catch up with users.
(A mistake in the ad revenue chart has been corrected) 

Last week, at a self-congratulatory celebration held by the French audit bureau of circulation (called OJD), the sports daily l’Equipe was honored for the best progression in  mobile audience. (I’m also happy to mention that Les Echos, the business group I’m working for, won the award for the largest growth in overall circulation with a gain of +3.3% in 2012 — in a national market losing 3.8%.) In terms of mobile page views, l’Equipe is three times bigger than the largest national daily (Le Monde). Unfortunately, its publisher tarnished the end the ceremony a bit by saying [I'm paraphrasing]: “Well, thanks for the award. But let’s not fool ourselves. The half of our digital traffic that comes from mobile represents only 5% of our overall digital revenue. We better react quickly, otherwise we’ll be dead soon”. While that outburst triggered only reluctant applause, almost everyone in the audience agreed.

Two days before, IREP (an advertising economics research organization) released 2012 data on advertising revenue for all media. Here is a quick look:

All media........... €13,300m......-3.5% 
TV...................€3,300m.......-4.5%
Print press (all)....€3,209m.......-8.2%
National Dailies.....€233m........ -8.9%
Internet Display.....€646m.........+4.8%
Internet Search......€1,141m.......+7%
Mobile...............€43m.........+29%

A few comments:
– The print press is nosediving faster than ever: In 2011, national dailies where losing 3.7% in revenue; in 2012, they lost almost 9%; and Q1 2013 doesn’t look better.
– On the digital side: Search is now almost twice as big as the display ads and it’s growing faster (7% vs. 4.8%). Google is grabbing most of this growth as the €1.14bn in revenue mentioned by IREP is roughly the equivalent of Google’s revenue in France.
– Mobile revenue is the fastest growing segment (+29%), but weighs only 2% of the entire digital segment (€1,830m revenue in 2012).

Looking at audiences reveals an even bleaker picture. Data compiled by the French circulation bureau for 87 media show that, between February 2012 and February 2013, the mobile applications audience grew 67% in visits and 102% in page views — again, in a segment that only grew 29% for 2012:

The conclusion is dreadful. Not only do audiences massively flock to mobile (more visits), but people spend more time in their favorite media app (with an even greater increase in page views) but, also, each viewer brings less and less money as ad revenues grew slower than visits — by a factor of two — and slower than page views — by a factor of three.

At the same time, in order to address this shift in audience, media are allocating more and more resources to mobile: Apps gain in sophistication and have to run on a greater number of devices. By the end of this year, the iOS ecosystem, until recently the simplest to deal with, will have at least five different screen sizes, and Android dozens of possible configurations. To add insult to injury, mobile apps don’t allow cookies, which prevents most measurements and users tend to randomly switch from their mobile devices to their PC or tablet, making tracking even more difficult…

Where do we go from here?

Publishers have no choice but following their readers. But, in doing so, they better be smart and select the right vectors. The coming months and years are likely to see scores of experiments. Native applications, meaning dedicated to a given ecosystem, might not last forever. As for now, they still offer superior performance but web apps, served from the internet regardless of the terminal’s operating system, are gaining traction. They become more fluid, accommodate more functionalities and improve their storage of contents for offline reading, but it will be a while before they become mainstream. In addition, web apps allow permanent improvements; if you look at the version number of web apps, you’ll see publishers pushing new releases on a weekly basis. They do so at will, as opposed to begging Apple to speed up the approval of native applications (not to mention the absence of a direct link to the customer.)

Similarly, many publishers are placing serious bets on responsive design sites that dynamically adjust to the screen size (see a previous Monday Note on Atlantic’s excellent business site Quartz). Liquid design, as it is also called, is great in theory but extremely difficult to develop and the slightest change requires diving into hugely complex HTML code (which also makes pages heavier to download and render.)

Technically speaking, in a near future, as rendering engines and processors keep improving, the shift to the mobile will no longer be a problem. But solving the low yield of mobile advertising is another matter. The advertising community evangelizes the promises of Real-Time Bidding; RTB basically removes the Ken and Barbie from the transaction process as demand and supply are matched through automated market places. But RTB is also known to pushes assets prices further down. As usual in the digital ad business, the likely winner will be Google, along with a few smaller players — before these are eventually crushed by Google.

The mobile ecosystem will come up with smarter innovations. Some will involve geo-located advertising, but the concept, great in demo, has yet to prove its revenue potential. Data collected through various means are much potent vector to stimulate mobile ads. Facebook knows it only too well: in the last quarter of 2012, it made $305m in mobile ads (that’s more than five times the French mobile ad market… in one quarter!); it accounts for 23% of FB’s total revenue.

Other technologies look more farfetched but quite promising. This article in the MIT Technology Review features a company that could solve a major issue, that is following users as they jump from one device to another. Drawbridge, Inc. was founded by Kamakshi Sivaramakrishnan, a statistics and probability PhD from Stanford. Her pitch (see a video here): bridging smartphones, tablets and PCs thanks to what she calls a “giant statistical space-time data triangulation technique”. In plain English: a model that generates clusters (based on patterns of usage and collected data) that will be used to create a “match” pinpointing an individual’s collection of devices. The goal is giving advertisers the ability to easily extend their campaigns from PC to mobile terminals. A high potential indeed. It caught the interest of two major venture capital firms, Kleiner Perkins Caufield & Byers and Sequoia Capital, who together injected $20m in the startup. Drawbridge claims to have already bridged about 540 million devices (at a rate or 800 per minute!)

This could be one of the many boards used to ride the Mobile rogue wave and, for many players, avoid drowning.

–frederic.filloux@mondaynote.com

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Critics spew well-meaning generalities when criticizing Marissa Mayer’s first moves at Yahoo! They fail to see the urgency of the company’s turnaround situation, the need to refocus the workforce and spruce up the management.

Last July, Yahoo! elected a new CEO, their seventh or eight, I’ve lost count. Marissa Mayer is an ex-Google exec with a BS in symbolics systems and an MS in Computer Science from Stanford, just like Scott Forstall. After a 13-year career at the biggest Cloud company on Earth, Mayer brings relevant experience to the CEO position of the once-great Web company. She also happens to be female but, unlike a predecessor of the same gender, Mayer doesn’t appear to feel the need to assert power by swearing like a sailor.

Power she asserts nonetheless. Barely pausing to deliver her first child, Mayer set to work: Yahoo! apps were too many, she vowed to cut them from 60 to the dozen or so that support our “digital daily habit“. Hiring standards have been seriously upgraded, the CEO wants to review every candidate to weed out “C-list slackers“. People were shown the door, starting in the executive suite. Some were replaced by ex-Google comrades such as her newly-appointed COO, Henrique De Castro.

The changes have been met with intramural criticism, from charges of Google cronyism to moaning over her meddling with the hiring process (“Yahoo’s Mayer gets internal flak for more rigorous hiring“). The complainers might as well get used to it: Mayer knows who she’s competing against, she wants to win, and that means Yahoo! needs to attract Valley-class talent. If she can pull them from Google, even better. The insiders who complain to the media only advertise their fear — a bad idea — and unwittingly make the case for Mayer’s higher standards.

The new sheriff is a high-intensity person. Friends tell me she also reviews new apps in great detail, down to color choices. (Didn’t another successful leader so annoy people?)

The protests over Mayer’s hiring practices and (supposed) micromanagement are nothing compared to the howls of pain over Mayer’s most controversial decision: No more Working From Home.

The prohibition is an affront to accepted beliefs about white-collar productivity, work/life balance, working mothers, sending less CO2 into the atmosphere. Does Mayer oppose a balanced life and a greener planet?

No, presumably — but reality intrudes. Once the king of the Web, Yahoo! stood by and watched as Google and Facebook seduced their users and advertisers. In 2008, in an effort to bolster its flagging on-line fortunes, Microsoft offered more than $44B to acquire Yahoo. The Board nixed the deal and Yahoo! kept sinking. Right before Mayer took the helm in July 2012, Yahoo’s market cap hovered around $16B, a decline of more than 60%.

The niceties of peacetime prosperity had to go. Unlike her “explicit” predecessor, Mayer doesn’t stoop to lash out at the protesters but one can imagine what she thinks: “Shut up, you whiners. This is a turnaround, not a Baja California cruise!”

In the Valley, WFH has long been controversial. In spite of its undeniable benefits, too-frequent abuses led to WFH becoming a euphemism for goofing off, or for starting a software business on one’s employer’s dime, an honored tradition.

Telecommuting requires a secure VPN (Virtual Private Network) connection from your computer at home to the company’s servers. These systems keep a traffic log, a record of who connects, from what IP address, when, for how long, how much data, and so on. Now, picture a CEO from the Google tradition of data analysis. She looks at the VPN logs and sees too much “comfort”, to be polite.

Mayer did what leaders do: She made a decision that made some people unhappy in order to achieve success for the whole enterprise (toned-up employees and shareholders). After seeing Yahoo! lose altitude year after year, the criticism leveled at Mayer makes me optimistic about the company’s future: Mayer’s treatment hurts where it needs to.

Among the many critics of Mayer’s no-WHF decision, the one I find most puzzling — or is it embarrassing? — emanates from the prestigious Wharton School of Business (at the University of Pennsylvania). In a Knowledge@Wharton article, scholars make sage but irrelevant comments such as:

Wharton faculty members who specialize in issues pertaining to employee productivity and work/life balance were similarly surprised by Mayer’s all-encompassing policy change. “Our experience in this field is that one-size-fits-all policies just don’t work,” notes Stewart Friedman, Wharton practice professor of management and director of the school’s Work/Life Integration Project. “You want to have as many tools as possible available to you as an executive to be able to tailor the work to the demands of the task. The fewer tools you have available, the harder it is to solve the problem.”

Nowhere in the article do the Wharton scholars consider the urgency of Yahoo’s situation, nor do they speculate that perhaps Mayer didn’t like what she found in the VPN logs. And, speaking of numbers, the Wharton experts provide no numbers, no sample size, no control group to buttress their statements. Our well-meaning academics might want to take a look at a recent blog post by Scott Adams, the prolific creator of corpocrat-skewering Dilbert cartoons. Titled Management/Success/Leadership: Mostly Bullshit, the post vigorously delivers what the title promises, as in this paragraph:

The fields of management/success/leadership are a lot like the finance industry in the sense that much of it is based on confusing correlation and chance with causation. We humans like to feel as if we understand and control our environments. We don’t like to think of ourselves as helpless leaves blowing in the wind of chance. So we clutch at any ridiculous explanation of how things work. 

Or this one, closer to today’s topic [emphasis mine]:

I first noticed the questionable claims of management experts back in the nineties, when it was fashionable to explain a company’s success by its generous employee benefits. The quaint idea of the time was that treating employees like kings and queens would free their creative energies to create massive profits. The boring reality is that companies that are successful have the resources to be generous to employees and so they do. The best way a CEO can justify an obscene pay package is by treating employees generously. To put this in another way, have you ever seen a corporate turnaround that was caused primarily by improving employee benefits?

Tony Hsieh, the founder and CEO of on-line shoe store Zappos, isn’t a blogger, cartoonist, or academic theoretician; he leads a very successful company that’s admired for its customer-oriented practices (culture, if you will). In this Business Insider piece, titled Here’s Why I Don’t Want My Employees To Work From Home, Hsieh is unequivocal about the value of Working From Work [emphasis mine]:

Research has shown that companies with strong cultures outperform those without in the long-term financially. So we’re big, big believers in building strong company cultures. And I think that’s hard to do remotely.

We don’t really telecommute at Zappos. We want employees to be interacting with each other, building those personal relationships and relationships outside of work as well.

What we found is when they have those personal connections that productivity increases because there’s higher levels of trust. Employees are willing to do favors for each other because they’re not just co-workers, but also friends, and communication is better. So we’re big believers in in-person interactions.

Who in good conscience believes that Mayer’s edict is absolute and permanent? You have a sick child at home, will you be granted the permission to work from home for a few days? Of course. Or, you’re an asocial but genius coder, will you be allowed to code at home from 10 pm to 7 am? Again, yes. Mayer saw it done, with good results, at her previous company.

With Mayer’s guidance, the patient has been stabilized and is on the road to recovery. But where does that road lead to? What does Yahoo! want to be now that it’s starting to act like a grownup? A better portal, a place to which we gravitate because, as an insider says, we’ll find more relevant fodder — without relying on “friends”? This would be a return to Yahoo’s original mission, one of cataloguing the Web, only with better technology and taste than Facebook, Google, AOL or even Microsoft’s Bing (Yahoo’s supplier of search data).

This leads to the $$ question, to Yahoo’s business model: advertising or services? With Google and now Facebook dominating the advertising space, how much room is left?

We hear Mayer is focusing Yahoo! on mobile applications. This sounds reasonable… but isn’t everyone?

In the search for a renewed identity (and profits), the question of alliances comes up. Who’s my enemy, my enemy’s enemy, irreplaceable partner/supplier, natural complement? In this regard, the Microsoft question will undoubtedly pop up again. I doubt Mayer has the utmost regard for Microsoft or for its CEO’s bullying style, but can she live without Bing? Is there an alternative? Also, what, if anything, could a healthier Yahoo! offer to Facebook or Apple?

The fun is just starting.

– JLG@mondaynote.com

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Autonomous vehicles — fully or partially — will rely on a large variety of data types. And guess who is best positioned to take advantage of this enormous new business? Yep, Google is. 

The Google driveless car is an extraordinary technical achievement. To grasp the its scope, watch this video featuring a near-blind man sitting behind the wheel of an autonomous Prius as the car does the driving. Or, to get an idea of the complexity of the system, see this presentation by Sebastian Thrun (one of the main architects of Google’s self-driving car project) going through the multiple systems running inside the car.

Spectacular as it is, this public demonstration is merely the tip of the iceberg. For Google, the economics of self-driving cars lie in a vast web of data that will become a must to operate partially or fully self-driving vehicles on a massive scale. This network of data will require immense computational and storage capabilities. Consider the following needs in the context of Google’s current position in related fields.

Maps. Since the acquisition of Where2 Technologies and Keyhole Inc. in 2004, Google has been refining its mapping system over and over again (see this brief history of Google Maps). After a decade of work, Google Maps feature a rich set of layers and functions. Their mapping of the world has been supplemented by crowdsourcing systems that allow corrections as well as the creation of city maps where data do not exist. Street View has been launched in 2007 and more than 5 million miles of metropolitan area have been covered. Today, maps are augmented with satellite imagery, 3D, 45-degree aerial views, buildings and infrastructure renderings. All this is now merged, you can plunge from a satellite view to the street level.

Google’s goal is building the most complete an reliable map system in the world. Gradually, the company replaces geo-data from third party suppliers with data collected by its own crews around the world. To get an idea of how fast Google progresses, consider the following: In 2008, Google mapping covered 22 countries and offered 13 million miles with driving directions. In 2012, 187 countries where covered, 26 million miles with driving directions, including 29 countries with turn-by-turn directions. On the chart below, you can also see the growing areas of Google-sourced maps (in green) as opposed to licensed data (in red):

Apple’s failure in maps shows that, regardless of the amount of money invested, experience remains a key element. In California and India, Google maintains a staff of hundreds if not thousands of people manually checking key spots in large metropolitan areas and correcting errors. They rely on users whose individual suggestions are manually checked, using Street View imagery as shown here (the operator drags the 360° Street View image to verify signs at an intersection — click to enlarge.)

Google’s engineers even developed algorithms aimed at correcting slight misalignments between “tiles” (pieces of satellite imagery stitched together) that could result from… tectonic plates movement — it could happen when two pictures are taken two years apart. Such accuracy is not a prerequisite for current navigation, but it could be important for autonomous cars that will depend heavily on ultra-precise (think what centimers/inches mean when cars are close on the road) mapping of streets and infrastructures.

But, one might object, Google is not the only company providing geo-data and great mapping services. True: The Dutch company Tom-tom, or the Chicago-based Navteq have been doing this for years. As geo-data became strategically important, Tom-tom acquired TeleAtlas for $2.9bn in 2008, and Nokia bought Navteq in 2007. But Google intends to move one step ahead by merging its mapping and imagery technologies with its search capabilities. Like in this image:

Accurate, usable and data-rich maps are one thing. Now, when you consider the variety of data needed for autonomous or semi-autonomous vehicles, the task becomes even more enormous. The list goes on:

Traffic conditions will be a key element. It’s pointless to envision fleets of self-driving, or assisted-driving cars without systems to manage traffic. These goes along with infrastructure development. For instance, as  Dr. Kara Kockelman, professor of transportation engineering at the University of Texas at Austin explained to me, in the future, we might see substantial infrastructure renovation aimed at accommodating autonomous vehicles (or vehicles set on self-driving mode). Dedicated highway corridors would be allocated to “platoons” of cars driving close together, in a faster and safer way, than manned cars. Intersections, she said, are also a key challenge as they are responsible for most traffic jams (and a quarter of accidents). With the advent of autonomous vehicles, we can see cars taken over by intersection management systems that will regroup them in platoons and feed them seamlessly in intersecting traffic flows, like in this spectacular simulation. If traffic lights are still needed, they will change every five or six seconds just to optimize the flow.

Applied to millions of vehicles, traffic and infrastructure management will turn into a gigantic data and communication problem. Again, Google might be the only entity able to write the required software and to deploy the data centers to run it. Its millions of servers will be of great use to handle weather information, road conditions (as cars might be able to monitor their actual friction on the road and transmit the data to following vehicles, or detect humidity and temperature change), parking data and fuel availability (gas or electricity). And we can even think of merging all this with day-to-day life elements such as individual calendars, commuting patterns and geolocating people through their cell phones.

If the data collection and crunching tasks can conceivably be handled by a Google-like player, communications remain an issue. “There is not enough overlap between car-to-car communication and in other fields”, Sven Beiker, director Center for Automotive Research  (CARS) at Stanford told me (see his recent lecture about The Future if the Car). He is actually echoing executives from Audi (who made a strategic deal with Google), BMW and Ford; together at the Mobile World Congress, they were critical of cell phone carriers’ inability to provide the right 4G (LTE) infrastructure to handle the amount of data required by future vehicles.

Finally, there is the question of an operating system for cars. Experts are divided. Sven Beiker believes the development of self-driving vehicles will depend more on communication protocols than on an OS per se. Others believe that Google, with its fleet of self-driving Priuses criss-crossing California, is building the first OS dedicated to autonomous vehicles. At some point, the search giant could combine its mapping, imagery and local search capabilities with the accumulation of countless self-driven miles, along with scores of specific situations “learned” by the cars’ software. The value thus created would be huge, giving Google a decisive position in yet another field. The search company could become the main provider of both systems and data for autonomous or semi autonomous cars.

– frederic.filloux@mondaynote.com

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Besides its ads, Apple says very little, confident numbers will do the talking. This no longer works as others have seized the opportunity to drive the narrative. 

The day before Samsung’s big Galaxy S4 announcement, Apple’s VP of Marketing, Phil Schiller, sat down for an interview with Reuters and promptly committed what Daring Fireball’s John Gruber calls an unforced error:

“…the news we are hearing this week [is] that the Samsung Galaxy S4 is being rumored to ship with an OS that is nearly a year old,” [Schiller] said, “Customers will have to wait to get an update.”

Not so, as Gruber quickly corrects:

But it ends up the S4 is — to Samsung’s credit — shipping with Android 4.2.2, the latest available version. Not sure why Schiller would speculate on something like this based solely on rumors.

To Samsung’s delight, we can be sure, the interview received wide coverage in publications such as the Wall Street Journal and Bloomberg, just hours before the S4 was unveiled, complete with the month-old Android operating system.

This didn’t go over well. Even before the “year old Android version” was exposed as unfounded conjecture, reactions to Schiller’s trash talk were uniformly negative. Apple was accused of being on the defensive.

But, the true-believers ask, isn’t this something of a double-standard? What about the trash talk Samsung ads that depicted the iPhone as old-fashioned and its users as either cult sheep or doddering golden agers, weren’t they also a form of defensiveness? Why were Samsung’s mean-spirited ads seen as fun and creative, while Schiller’s slight misstep is called “defensive”?

Yes, Apple is held to a (well earned) different standard. Once a challenger with an uncertain future, Apple has become The Man. Years ago, it could productively poke fun at Microsoft in the great I’m a Mac, You’re a PC campaign (the full series of ads is here), but the days of taking potshots at the incumbent are over. Because of its position at the top, Apple should have the grace to not trash its competitors, especially when the digs are humorless and further weakened by error.

Schiller’s faux pas will soon be forgotten — it was a minor infraction, a five yard penalty — but it stoked my enduring frustration with a different sort of Apple-speak characteristic: The way Apple execs abuse words such as “incredible“, “great“, “best“ when they’re discussing the company’s products and business.

My accusation of language molestation needs examples. Citing a page from W. Edwards Deming’s gospel, In God We Trust, Everyone Else Brings Data, I downloaded a handful of Apple earnings calls, such as this one, courtesy of Seeking Alpha, and began to dig.

[Speaking of language faux pas, Deming’s saying was shamelessly and badly appropriated — without attribution — by Google’s Eric Schmidt in a talk at MIT.)

Looking just for the words that emanated from the horses’ mouths, I stripped the intros and outros and the question parts of the Q&As, and pasted into Pages (which has, sadly, lain fallow since January 2009).  Pages has a handy Search function (in the Edit > Find submenu) that compiles a list of all occurrences of a word in a document; here’s what I found… .

• Across the five earnings statements, some form of the word “incredible” appears 7, 9, 9, 11 and 9 times. The Search function offers a handy snippet display so you can check the context in which the word was used:

• “Tremendous”, in its various forms, appears 12 times.
• Amazing: 8
• Strong: 58
• Thrilled: 13
• Maniacally focused: 2
• All told, “great” appears 70 times. A bit more than half are pathetic superlatives (“great products”, “great progress”, “we feel great about…”), some are innocuous (“greater visibility”), but there’s an interesting twist: The snippet display showed that six were part of the phrase “Greater China”:

“Greater” or not, China is mentioned 71 times, much more than any other country or region I checked (Korea =  1, Japan = 6, Europe = 12).

(In the interest of warding off accusations of a near-obsessive waste of energy, I used a command line program to generate some of these numbers. Android? give me a second…4. Google=0, Facebook=4, Samsung=2.)

Now let’s try some “sad” words:

• Disappoint: 0
• Weak: 7. Six of these were part of “weak dollar”; the other was “weak PC market”. By contrast, only five or six of the 58 “strongs” referred to the dollar; the rest were along the lines of “strong iPad sales”.
• Bad: 0
• Fail: 0

The dissection can go on and on, but let’s end it with a comparison between “more“ and “less“ . Eliminating instances of less as a suffix (“wireless”), the result shows a remarkable unbalance: “more” wins each of the five sessions with a consistently lopsided score: 28 to 3…more or less.

But, you’ll object, what’s wrong with being positive?

Nothing, but this isn’t about optimism, it’s about hyperbole and the abuse of language. Saying “incredible” too many times leads to incredulity. Saying “maniacally focused” at all is out of place and gauche in an earnings call. One doesn’t brag about one’s performance in the boudoir; let happy partners sing your praise.

When words become empty, the listener loses faith in the speaker. Apple has lost control of the narrative; the company has let others define its story. This is a war of words and Apple is proving to be inept at verbal warfare.

In another of his sharply worded analyses titled Ceding the Crown, John Gruber makes the same point, although from a different angle:

The desire for the “Oh, how the mighty Apple has fallen” narrative is so strong that the narrative is simply being stated as fact, evidence to the contrary be damned. It’s reported as true simply because they want it to be true. They’re declaring “The King is dead; long live the King” not because the king has actually died or abdicated the throne, but because they’re bored with the king and want to write a new coronation story.

I agree with the perception, but blaming the media rarely produces results, we shouldn’t point our criticism in the wrong direction. The media have their priorities, which more often than not veer in the direction of entertainment passed as fair and balanced information (see Amusing Ourselves To Death by Neil Postman). If Apple won’t feed them an interesting, captivating story, they’ll find it elsewhere, even in rumors and senseless hand-wringing.

Attacking competitors, pointing to their weaknesses, and trumpeting one’s achievements is better done by hired media assassins. A company, directly or through a PR firm, engages oft-quoted consultants who provide the required third-party stats, barbs, and encomiums. This isn’t theorizing, I once was a director at a company, one of many, that used such an arrangement to good effect.

A brief anecdote: When Microsoft was Microsoft, Waggener Edstrom, the company’s PR powerhouse, was an exemplary propagandist. I distinctly remember a journalist from a white-shoe East Coast business publication coming to my office more than twenty years ago, asking very pointed questions. I asked my own questions in return and realized that the individual didn’t quite know the meaning of certain terms that he was throwing around. A bit of hectoring and cajoling, and the individual finally admitted that the questions were talking points provided by the Seattle PR firm. A few years later, I got a comminatory phone call from one of the firm’s founders. My offense? I had made an unflattering quip about Microsoft when it was having legal troubles with Apple (the IP battle that was later settled as part of the 1997 “investment” in Apple and Steve Jobs). PR firms have long memories and sharp knives.

The approach may seem cynical, but it’s convenient and effective. The PR firm maintains a net (and that’s the right word) of relationships with the media and their pilot fish. If it has the talent of a Waggener Edstrom, it provides sound strategic advice, position papers, talking points, and freeze-dried one-liners.

Furthermore, a PR firm has the power of providing access. I once asked a journalist friend how his respected newspaper could have allowed one of its writers to publish a fellacious piece that described, in dulcet tones, a worldwide Microsoft R&D tour by the company’s missus dominicus. “Access, Jean-Louis, access. That’s the price you pay to get the next Ballmer interview…”

Today, look at the truly admirable job Frank Shaw does for Microsoft. Always on Twitter, frequently writing learned and assertive pieces for the company’s official blog. By the way, where’s Apple’s blog?

The popular notion is that Apple rose to the top without these tools and tactics, but that’s not entirely true. Dear Leader was a one-man propagandastaffel, maintaining his own small network of trusted friends in the media. Jobs also managed to get exemptions from good-behavior rules, exemptions that seem to have expired with him…

Before leaving us, Jobs famously admonished “left-behind” Apple execs to think for themselves instead of trying to guess what he would have done. Perhaps it’s time for senior execs to rethink the kind of control they want to exercise on what others say about Apple. Either stay the old course and try to let the numbers do the talking, or go out and really fight the war of words. Last week’s misstep didn’t belong to either approach.

One last word: In the two trading days bracketing the Samsung S4 launch Schiller clumsily attempted to trash, Apple shares respectively gained 1%, followed by a 2.58% jump the day after the intro. Schiller could have said nothing before the launch and, today, let others point to early criticism of the S4′s apparent featuritis.

– JLG@mondaynote.com

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When looking at the potential for a really smart watch, the idea of an Apple iWatch looks almost sensible. Still, there is a long way between the attractive idea and stuffing the required computer power in a wristwatch.

As I somberly contemplate the death of personal privacy, our being spied upon everywhere, at all times (for our own good, you understand), a tweet from an ex-coworker known for his stiletto wit evokes a welcome smile:

Frank is referring to Nick Hayek Jr., the cigar-wielding head of Swatch Group AG (and Zino Davidoff doppelgänger):

In a Bloomberg article (from which the above photo is extracted), Hayek dismisses the iWatch rumors:

“Personally, I don’t believe it’s the next revolution,” the chief of the largest Swiss watchmaker said at a press conference on annual results in Grenchen, Switzerland. “Replacing an iPhone with an interactive terminal on your wrist is difficult. You can’t have an immense display.”

Hayek’s pronouncement triggered many sharp reactions, such as this history lesson from another sharp tweeter:

As Kontra (a “veteran design and management surgeon”) reminds us, Palm CEO Ed Colligan once famously pooh-poohed the unannounced iPhone

We’ve learned and struggled for a few years here figuring out how to make a decent phone, […] PC guys are not going to just figure this out. They’re not going to just walk in.

Colligan’s brush-off wasn’t the first time, or the last, that Apple’s “unauthorized intrusions” were decried by industry incumbents and arbiters of business taste:

• The iPod: A doomed foray into the saturated, profitless market of commodity MP3 players.
• iTunes: Single tracks for 99 cents? Not a chance against free online music sites.
• Apple Stores: Another folly, zero experience in the cutthroat and manpower intensive retail business.
• iPhone: The status quotidians scoff.
• Homegrown ARM-based processors: A billion dollar mistake.
• iPad: Ridiculous name. Steve Ballmer derides its lack of keyboard and mouse.

This isn’t to deny that the Apple Midas Touch is occasionally fat fingered. Prior to its launch, Steve Jobs touted MobileMe as Exchange For The Rest of Us; afterwards, he told the MobileMe team they should “hate each other for letting each other down”. Last year, Tim Cook had no choice but to apologize for the iMaps fiasco (and then showed a couple Apple executives the door).

So how would this hypothetical iWatch play out? Can Apple re-invent a known device à la the iPod, or are they venturing into territory without a map (or, one can’t resist, with an iMap)?

First, a brief look at today’s watches, smart and not.

After five centuries of improvements to their time keeping mechanisms (or movements), mechanical watches are no longer judged for their temporal accuracy, but for their beauty and, just as important, for the number and ingeniousness of their complications — what non-horologists would call “additional functions”. It’s not enough to just tell the time, watches must display the phases of the moon and positions of the planets, function as a  chronograph, provide a perpetual calendar… The moniker grande complication is applied to the most advanced, such as this one from the Gallet company (founded in 1466):

These complications come at a price: For $300k you can pick up the double-faced Patek Philippe Sky Moon Tourbillon with its 2800-star celestial chart. The Franck Muller Aeternitas Mega 4, which holds the record with 36 complications and 1400 parts, will set you back $2.7M:

These luxury watches function more as engineering marvels than utilitarian timepieces, and, accordingly, they’re worn as adornments — and status symbols.

The more common electronic watch, which uses a precise quartz oscillator and typically has no moving parts, hasn’t entirely killed the mechanical watch, but it hasn’t been for lack of trying. Electronic watchmakers, aided by the tiny microprocessors embedded in many of these devices, have piled on even more more functions — calculators, multiple repeating alarms, even circular slide rules…it’s simply an exercise in the proverbial mere matter of software.

But each new function introduces UI complexity, as this page from the instruction manual for my Seiko multi-function watch establishes:

Most of the manual’s 33 pages are in the same vein. As a result, normal humans find these electronic complications baffling and leave most of the functions unmolested.

And now we have the smartwatch, a true computer that’s strapped to your wrist. Today’s smartwatch will tell you the time and run some rudimentary applications, but its primary role is to act as an extension of the smartphone that you’ve paired through Bluetooth. A phone call comes in, your watch shows you the number; an email message arrives, your watch scrolls the sender’s address; if the music you’re streaming on your phone is too quiet, just tap your watch to turn it up…at least in theory.

These are all good ideas, but, as the NYT’s David Pogue found after test driving a sampling of these devices, their execution leaves something to be desired. His conclusion:

…you have to wonder if there’s a curse on this blossoming category. Why are these smartwatches so buggy, half-baked and delayed?
The Casio and Martian watches are worth considering. But if you ask the other watches what time it is, they’ll tell you: too soon.

So, again, where does the putative iWatch fit into all of this?

Let’s start with the UI. If we just regard the traditional chronological functions (date and time formats, alarms, stopwatch) an iPhone-like touch interface, albeit on a smaller screen, would easily eclipse the clunky buttons-along-the perimeter controls on my Seiko. For the more advanced “smart” functions, one assumes that Apple won’t be satisfied unless the user experience far exceeds the competition. (Of the five smartwatches that Pogue reviews, only one, the Cukoo, has even a hint of touch screen capability.)

Then there’s the matter of overall style. This isn’t a fair fight; there’s something viscerally compelling about a traditional mechanical watch with exposed movement. Even on the low end of the market you can find a mechanical watch that displays its inner beauty. Nonetheless, we can trust Sir Jony to rise to the challenge, to imagine the kind of style we’ve come to expect.

There’s also the battery question. Will the iWatch suffer from having a two or three days battery life as suggested by “[s]ources close to Apples [sic] project team”? Leaving aside conjectures about the anatomical location whence emerged these sources’ information, two thoughts come up…

First, it’s a safe assumption that the target audience for the iWatch are iDevice owners that Apple has “trained” (subjugated, critics will say) to charge their devices at night. For them, charging the iWatch, as well, won’t be a dealbreaker. The Lightning connector and charger for an iPhone or iPad should be small enough to fit a largish watch. Or perhaps the addition of the iWatch to the iDevice constellation will convince Apple to incorporate wireless charging (despite the diffidence of Phil Schiller, Apple’s VP of marketing).

Second, some electronic watches don’t need batteries at all. In Seiko’s Kinetic line, the kinetic motion of the wearer’s hand drives a tiny generator that feeds electricity into a capacitor for storage. (For the inert watch wearer, stem winding works as well. In a clever twist, some of newer models preserve the stored charge by halting the motion of the hands when the watch isn’t being worn.) It’s unclear whether the energy captured from hand movements will suffice to feed an ambitious Apple smartwatch, but the technology exists.

Turning to more advanced functionality: Will the iWatch be an iOS device? I think it’s very likely. That doesn’t mean that the iWatch will be an iPhone/iPod Touch, only smaller. Instead, and as we see with today’s Apple TV, the iWatch will enrich the iOS ecosystem: Reasonably useful on its own, but most important as a way to increase the value/enjoyment of other iDevices…at least for now.

Eventually, and as I’ve written here several times, I believe the Apple TV will become a first class citizen, it will have its own versions of apps that were written for the iPhone/iPad, as well as apps that are for TV alone. With iOS as the lingua franca, the iWatch could be treated with the same respect.

There are plenty of examples of apps that would work on a very small screen, either in conjunction with existing data (calendar, address book, stock market, iMessage, weather) or as a remote for other devices, including non-Apple products (the Nest thermostat comes to mind).

We should also consider biometric applications. The intimate contact of the iWatch makes it a natural carrier for the ever-improving sensors we find in today’s health monitors, devices that measure and record heart rate and perspiration during a workout, or that monitor sleep patterns and analyze food intake. What we don’t find, in these existing gadgets, is the ability to download new apps. An iWatch with health sensors coupled with the App Store would open whole new health and wellness avenues.

Finally, there’s (always) the money question. Would our mythical iWatch sell in sufficient volume — and with a high enough margin — to make it a significant product line for Apple? Given that watches easily sell for hundreds of dollars, and that we would almost certainly use an Apple iWatch more often and for more purposes than an Apple TV, the volume/margin question isn’t too hard to answer.

Back to reality, translating a fantasy into a real product is by no means a sure thing. A pleasant, instantaneous user experience requires computing power. Computing power requires energy; energy means battery drain and heat dissipation. These are challenges for real grown-ups. And sometimes a grown-up has to make the vital No We Won’t Do This decision that separates bloated demi-failures from truly elegant genre-creating breakthroughs.

– JLG@mondaynote.com

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As seen last week in Barcelona, the mobile industry is red hot. The media sector will have to work harder to capture its share of that growth.

The 2013 edition of the Mobile World Congress held last week in Barcelona was as large as the biggest auto-show in the world: 1500 exhibitors and a crowd of 72,000 attendees from 200 countries. The mobile industry is roaring like never before. But the news media industry lags and will have to fight hard to stay in the game. Astonishingly, only two media companies deigned to show up: Pearson with its huge education business accounting for 75% of its 2012 revenue (vs. 7% for its Financial Times unit); and Agence France-Presse which is entering the customized application market. No other big media brand in sight, no trade organizations either. Apparently, the information sector is about to miss the mobile train.

Let’s begin with data that piqued my interest, from AT Kearney surveys for the GSM Association.

Individual mobile subscribers: In 2012, the worldwide number of mobile subscribers reached 3.2 billion. A billion subscribers was added in the last four years. As the world population is expected to grow by 1.1% per year between 2008 and 2017, the mobile sector enjoyed a 8.3% CAGR (Compound Annual Growth Rate) for the 2008-2012 period. For the 2012 – 2017 interval the expected CAGR is 4.2%. The 4 billion subscribers mark will be passed in 2018. By that time, 80% of the global population will be connected via a mobile device.

The rise of the machines. When machine-to-machine (M2M) connections are taken into account, growth becomes even more spectacular: In 2012, there were 6.8 billion active SIM cards, 3% of them being M2M connections. In 2017, there will be 9.7 billion active SIM cards and the share of M2M connections will account for 13% with almost 1.3 billion devices talking to each other.
The Asia-Pacific region will account for half of the connection growth, both for individual subscriptions and M2M.

We’ll now turn to stats that could benefit the media industry.

Mobile growth will be mostly driven by data usage. In 2012, the volume of data exchanged through mobile devices amounted to .9 exabytes per month (1 exabyte = 1bn gigabytes), this is more than the all preceding years combined! By 2017, it is expected to reach 11.2 exabytes, that’s a 66% CAGR!

A large part of this volume will come from the deployment of 4G (LTE) networks. Between now and 2017, deploying LTE technology will result in a 4X increase in connection speeds.

For the 2012 – 2017 period, bandwidth distribution is expected to grow as follows:

M2M:......... +89% 
Video:....... +75% 
Gaming:...... +62% 
Other data:...+55% 
File sharing: +34% 
VoIP:........ +34%

Obviously, the huge growth of video streaming (+75%) points to a great opportunity for the media industry as users will tend to watch news capsules on-the-go in the same way they today look at a mobile web sites or an app (these two will be part of the 55% annual growth).

The growing social mobility will also be an issue for news media. Here are the key figures for today in active mobile users

Facebook:...680m 
Twitter:....120m 
LinkedIn:....46m 
Foursquare:..30m

Still, as important as it is, social usage only accounts for 17 minutes per day, vs. 25 minutes for internet browsing and a mere 12 minutes for voice calls. Most likely, the growth of video will impact the use of social networks as Facebook collects more and more videos directly uploaded from smartphones.

A large part of this growth will be driven by the rise of inexpensive smartphones. Last week in Barcelona, the largest stand was obviously Samsung’s. But a huge crowd also gathered around Huawei or ZTE showing sophisticated Android-powered smartphones — at much lower prices. This came as a surprise to many westerners like me who don’t have access to these Chinese devices. And for emerging markets, Firefox is coming with a HTML5 operating system that looked surprisingly good.

In years to come, the growing number of operating systems, screen sizes and features will be a challenge. (At the MWC, the trend was definitely in favor of large screens, read this story in Engadget.) An entire hall was devoted to applications — and software aimed at producing apps in a more standardized, economical fashion. As a result, we might see three approaches to delivering contents on mobile:
- The simplest way will be mobile sites based on HTML5 and responsive design; more features will be embedded in web applications.
- The second stage will consist of semi-native apps, quickly produced using standardized tools, allowing fast updates and adaptations to a broad range of devices.
- The third way will involve expensive deep-coded native apps aimed at supporting sophisticated graphics; they will mainly be deployed by the gaming industry.

In upcoming Monday Notes, we will address two majors mobile industry trends not tied to the media industry: Connected Living (home-car-city), a sector likely to account for most machine-to-machine use; and digital education taking advantage of a happy combination of more affordable handsets and better bandwidth.

– frederic.filloux@mondaynote.com

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As they approach the one million apps mark, smartphone and tablet app stores leave users stranded in thick, uncharted forests. What are Google and Apple waiting?

Last week, Google made the following announcement:

Mountain View, February 24th, 2013 — As part of an industry that owes so much to Steve Jobs, we remember him on this day, the 58th anniversary of his birth, with great sadness but also with gratitude. Of Steve’s many achievements, we particularly want to celebrate the Apple App Store, the venerable purveyor of iPhone software. 

Introduced in 2008, the App Store was an obvious and natural descendant of iTunes. What wasn’t obvious or foreseen was that the App Store would act as a catalyst for an entire market segment, that it would metamorphose the iPhone from mere smartphone to app phone. This metamorphosis provided an enormous boost to the mobile industry worldwide, a boost that has benefitted us all and Google more than most.

But despite the success of the app phone there’s no question that today’s mobile application stores, our own Google Play included, are poorly curated. No one seems to be in charge, there’s no responsibility for reviewing and grading apps, there’s no explanation of the criteria that goes into the “Editors’ Picks”, app categorization is skin deep and chaotic.

Today, we want to correct this fault and, at the same time, pay homage to Steve’s elegant idea by announcing a new service: The Google Play Red Guide. Powered by Google’s human and computer resources, the Red Guide will help customers identify the trees as they wander through the forest of Android apps. The Red Guide will provide a new level of usefulness and fun for users — and will increase the revenue opportunities for application developers.

With the Google Play Red Guide, we’ll bring an end to the era of the uncharted, undocumented, and poorly policed mobile app store.

The Red Guide takes its name from another great high-tech company, Michelin. At the turn of the 20th century, Michelin saw it needed to promote automotive travel in order to stimulate tire sales. It researched, designed and published great maps, something we can all relate to. To further encourage travel, Michelin published Le Guide Rouge, a compendium of hotels and restaurant. A hundred years later, the Michelin Red Guide is still considered the world’s standard; its inspectors are anonymous and thus incorruptible, their opinions taken seriously. Even a single star award (out of three) can put an otherwise unknown restaurant on the map — literally.

Our Red Guide will comprise the following:

- “Hello, World”, a list of indispensable apps for the first time Android customer (or iPhone apostate), with tips, How-To guides, and FAQs.
- “Hot and Not”. Reviews of new apps and upgrades — and the occasional downgrade.
- “In Our Opinion”. This is the heart of the Guide, a catalogue of reviews written by a select group of Google Play staff who have hot line access to Google’s huge population of in-house subject matter experts. The reviews will be grouped into sections: Productivity, e-Learning, Games, Arts & Creativity, Communication, Food & Beverage, Healthcare, Spirituality, Travel, Entertainment, Civics & Philanthropy, Google Glass, with subcategories for each.

Our own involvement in reviewing Android apps is a novel — perhaps even a controversial — approach, but it’s much needed. We could have taken the easy path: Let users and third-parties provide the reviews. But third party motives are sometimes questionable, their resources quickly exhausted. And with the Android Store inventory rapidly approaching a million titles, our users deserve a trustworthy guide, a consistent voice to lead them to the app that fits.

We created the Red Guide because we care about our Android users, we want them to “play safe” and be productive, and we feel there’s no better judge of whether an application will degrade your phone’s performance or do what it claims than the people who created and maintain the Android framework. For developers, we’re now in a position to move from a jungle to a well-tended garden where the best work will be recognized, and the not-so-great creations will be encouraged to raise their game.

We spent a great deal of time at Google identifying exactly the right person to oversee this delicate proposition…and now we can reveal the real reason why Google’s Motorola division hired noted Macintosh evangelist, auteur, and investor Guy Kawasaki as an advisor: Guy will act as the Editor in Chief of the Google Play Red Guide.

With Guy at the helm, you can expect the same monkish dedication and unlimited resources we deployed when we created Google Maps.

As we welcome everyone to the Google Play Red Guide, we again thank Steve Jobs for his leadership and inspiration. Our algorithms tell us he would have approved.

The Red Guide is an open product and will be published on the Web at AppStoreRedguide.com as well as in e-book formats (iBookstore and Kindle formats pending approval) for open multi-platform enjoyment.
——– 

No need to belabor the obvious, you’ve already figured out that this is all a fiction. Google is no better than Apple when it comes to their mobile application store. Both companies let users and developers fend for themselves, lost in a thick forest of apps.

That neither company seems to care about their online stores’ customers makes no sense: Smartphone users download more apps than songs and videos combined, and the trend isn’t slowing. According to MobiThinking:

IDC predicts that global downloads will reach 76.9 billion in 2014 and will be worth US$35 billion.

Unfortunately, Apple appears to be resting on its laurels, basking in its great App Store numbers: 40 billion served, $8B paid to developers. Perhaps the reasoning goes like this: iTunes served the iPod well; the App Store can do the same for the iPhone. It ain’t broke; no fix needed.

But serving up music and movies — satisfying the user’s established taste with self-contained morsels of entertainment — is considerably different from leading the user to the right tool for a job that may be only vaguely defined.

Apple’s App Store numbers are impressive… but how would these numbers look like if someone else, Google for example, showed the kind of curation leadership Apple fails to assert?

– JLG@mondaynote.com

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A closer look at Google’s patent for its news retrieval algorithm reveals a greater than expected emphasis on quality over quantity. Can this bias stay reliable over time?

Ten years after its launch, Google News’ raw numbers are staggering: 50,000 sources scanned, 72 editions in 30 languages. Google’s crippled communication machine, plagued by bureaucracy and paranoia, has never been able to come up with tangible facts about its benefits for the news media it feeds on. It’s official blog merely mentions “6 billion visits per month” sent to news sites and Google News claims to connect “1 billion unique users a week to news content” (to put things in perspective, the NYT.com or the Huffington Post are cruising at about 40 million UVs per month). Assuming the clicks are sent to a relatively fresh news page bearing higher value advertising, the six billion visits can translate into about $400 million per year in ad revenue. (This is based on a $5 to $6 revenue per 1,000 pages, i.e. a few dollars in CPM per single ad, depending on format, type of selling, etc.) That’s a very rough estimate. Again: Google should settle the matter and come up with accurate figures for its largest markets. (On the same subject, see a previous Monday Note: The press, Google, its algorithm, their scale.)

But how exactly does Google News work? What kind of media does its algorithm favor most? Last week, the search giant updated its patent filing with a new document detailing the thirteen metrics it uses to retrieve and rank articles and sources for its news service. (Computerworld unearthed the filing, it’s here).

What follows is a summary of those metrics, listed in the order shown in the patent filing, along with a subjective appreciation of their reliability, vulnerability to cheating, relevancy, etc.

#1. Volume of production from a news source:

A first metric in determining the quality of a news source may include the number of articles produced by the news source during a given time period [week or month]. [This metric] may be determined by counting the number of non-duplicate articles produced by the news source over the time period [or] counting the number of original sentences produced by the news source.

This metric clearly favors production capacity. It benefits big media companies deploying large staffs. But the system can also be cheated by content farms (Google already addressed these questions); new automated content creation systems are gaining traction, many of them could now easily pass the Turing Test.

#2. Length of articles. Plain and simple: the longer the story (on average), the higher the source ranks. This is bad news for aggregators whose digital serfs cut, paste, compile and mangle abstracts of news stories that real media outlets produce at great expense.

#3. “The importance of coverage by the news source”. To put it another way, this matches the volume of coverage by the news source against the general volume of text generated by a topic. Again, it rewards large resource allocation to a given event. (In New York Times parlance, such effort is called called “flooding the zone”.)

#4. The “Breaking News Score”:   

This metric may measure the ability of the news source to publish a story soon after an important event has occurred. This metric may average the “breaking score” of each non-duplicate article from the news source, where, for example, the breaking score is a number that is a high value if the article was published soon after the news event happened and a low value if the article was published after much time had elapsed since the news story broke.

Beware slow moving newsrooms: On this metric, you’ll be competing against more agile, maybe less scrupulous staffs that “publish first, verify later”. This requires a smart arbitrage by the news producers. Once the first headline has been pushed, they’ll have to decide what’s best: Immediately filing a follow-up or waiting a bit and moving a longer, more value-added story that will rank better in metrics #2 and #3? It depends on elements such as the size of the “cluster” (the number of stories pertaining to a given event).

#5. Usage Patterns:

Links going from the news search engine’s web page to individual articles may be monitored for usage (e.g., clicks). News sources that are selected often are detected and a value proportional to observed usage is assigned. Well known sites, such as CNN, tend to be preferred to less popular sites (…). The traffic measured may be normalized by the number of opportunities readers had of visiting the link to avoid biasing the measure due to the ranking preferences of the news search engine.

This metric is at the core of Google’s business: assessing the popularity of a website thanks to the various PageRank components, including the number of links that point to it.

#6. The “Human opinion of the news source”:

Users in general may be polled to identify the newspapers (or magazines) that the users enjoy reading (or have visited). Alternatively or in addition, users of the news search engine may be polled to determine the news web sites that the users enjoy visiting. 

Here, things get interesting. Google clearly states it will use third party surveys to detect the public’s preference among various medias — not only their website, but also their “historic” media assets. According to the patent filing, the evaluation could also include the number of Pulitzer Prizes the organization collected and the age of the publication. That’s for the known part. What lies behind the notion of “Human opinion” is a true “quality index” for news sources that is not necessarily correlated to their digital presence. Such factors clearly favors legacy media.

# 7. Audience and traffic. Not surprisingly Google relies on stats coming from Nielsen Netratings and the like.

#8. Staff size. The bigger a newsroom is (as detected in bylines) the higher the value will be. This metric has the merit of rewarding large investments in news gathering. But it might become more imprecise as “large” digital newsrooms tend now to be staffed with news repackagers bearing little added value.

#9. Numbers of news bureaus. It’s another way to favor large organizations — even though their footprint tends to shrink both nationally and abroad.

#10. Number of “original named entities”. That’s one of the most interesting metric. A “named entity is the name of a person, place or organization”. It’s the primary tool for semantic analysis.

If a news source generates a news story that contains a named entity that other articles within the same cluster (hence on the same topic) do not contain, this may be an indication that the news source is capable of original reporting.

Of course, some cheaters insert misspelled entities to create “false” original entities and fool the system (Google took care of it). But this metric is a good way to reward original source-finding.

#11. The “breadth” of the news source. It pertains to the ability of a news organizations to cover a wide range of topics.

#12. The global reach of the news sources. Again, it favors large media who are viewed, linked, quoted, “liked”, tweeted from abroad.

This metric may measure the number of countries from which the news site receives network traffic. In one implementation consistent with the principles of the invention, this metric may be measured by considering the countries from which known visitors to the news web site are coming (e.g., based at least in part on the Internet Protocol (IP) addresses of those users that click on the links from the search site to articles by the news source being measured). The corresponding IP addresses may be mapped to the originating countries based on a table of known IP block to country mappings.

#13. Writing style. In the Google world, this means statistical analysis of contents against a huge language model to assess “spelling correctness, grammar and reading levels”.

What conclusions can we draw? This enumeration clearly shows Google intends to favor legacy media (print or broadcast news) over pure players, aggregators or digital native organizations. All the features recently added, such as Editor’s pick, reinforce this bias. The reason might be that legacy media are less prone to tricking the algorithm. For once, a know technological weakness becomes an advantage.

—frederic.filloux@mondaynote.com

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The iPad placed a clear bet on simplicity — and was criticized for it. The bet won. But now, can the iPad evolve toward more business applications without sacrificing its simplicity, without becoming a “fridge-toaster”?

Three years ago, the iPad came out. The device was an immediate hit with customers and (most) critics. Steve Jobs’ latest — and, unfortunately, last — creation truly deserved the oft-abused game changer moniker.

But, as always, there were grumblings up in the cheap seats. As Mike Monteiro, co-founder of Mule Design observed:

“Following along on Twitter I was seeing things like ‘underwhelming’, ‘meh’ , ‘it’s not open’, ‘it’s just a big iPhone’, etc. And most of this stuff was coming from people who design and build interactive experiences.”

Monteiro penned a sharp, relevant response to the naysayers. Titled “The Failure of Empathy“, his post is summarized by this picture:

A generation ago, geeks were the arbiters of taste in the world of personal computing. Programmers, designers, hobbyists and tinkerers…these were the inhabitants of “user space”, and we built computers with them in mind. By designing the Apple ][ for himself (and his fellow travelers) Steve Wozniak hit the bull’s eye of a large, untapped target.

Today, geeks are but a smallish subset of computer users. Their (typically exaggerated) negative comments may have some sting if you’re responsible for engineering the “brain dead” backing store for a windowing system, but in the real world, no one cares about “byte sex” or “loop unrolling”. What counts is how non-technical users think, feel, and respond. Again, from Monteiro’s post:

“As an industry, we need to understand that not wanting root access doesn’t make you stupid. It simply means you do not want root access. Failing to comprehend this is not only a failure of empathy, but a failure of service.”

This was written in February 2010; I doubt that anyone at the time thought the iPad would ascend to such heights so quickly: 65.7M sold in 2012, 121M since the 2010 debut, rising even faster than the iPhone.

This is all well and good, but with success comes side effects. As the iPad gets used in ways its progenitors didn’t anticipate, another failure of empathy looms: Ignoring the needs of people who want to perform “complicated” tasks on their iPads.

When the iPad was introduced, even the most obliging reviewers saw the device as a vehicle for consumption, not creation. David Pogue in the New York Times:

“…the iPad is not a laptop. It’s not nearly as good for creating stuff. On the other hand, it’s infinitely more convenient for consuming it — books, music, video, photos, Web, e-mail and so on.”

This is still true…but that hasn’t stopped users from trying — struggling — to use their iPads for more ambitious tasks: Building rich media presentations and product brochures, preparing course material, even running a business. Conventional wisdom tells us that these are tasks that fall into the province of “true” personal computers, but these driven users can’t help themselves, they want to do it all on their iPads. They want the best of both worlds: The power of a PC but without its size, weight, (relative) unresponsiveness, and, certainly, price.

The evidence is all around us. Look at how many people in cafés, offices and airport lounges use a keyboard with their iPad, such as this Origami combo:

Or the Logitech Keyboard Cover:

Both keyboards are prominently displayed in the Apple Store. We’ll assume that shelf space isn’t doled out by lottery (or philanthropically), so these devices must be selling briskly.

Of course, this could just be anecdotal evidence. What isn’t anecdotal is that Apple itself claims that the iPad has penetrated a large proportion of Fortune 500 companies. In some of its stores, the company conducts sessions to promote the use of iPads in business applications.

I attended one such gathering last year. There was a very basic demonstration of Keynote, iPad’s presentation app, plus the testimony of a happy customer who described the usefulness of the iPad in sales situations. All quite pleasant, but the Q&A session that followed was brutal and embarrassing: How do you compose real-world, mixed-document presentation? No real answer. Why can’t the iPad access all the documents — not just iWork files — that I dropped into iCloud from my Mac? No answer there, either.

This brings us to a major iPad obstacle: On a “real” PC the file system is visible, accessible; on the iPad, it’s hidden. The act of creating, arranging, accessing files on a PC is trivial and natural. We know how to use Finder on the Mac and Explorer on Windows. We’re not perplexed by folder hierarchies: The MyGreatNovel folder might contain a lengthy set of “MGN-1″, “MGN-2″, “MGN-3″ drafts, as well as subfolders such as ArtWork, Reference, and RejectionLetters, each of which contain further subfolder refinements (RejectedByGrove, RejectedByPenguin, RejectedByRandomHouse…).

On an iPad you don’t navigate a file system but, instead, you launch an app that has it’s own trove of documents that it understands — but it can’t “see” anything else.

For example: Keynote doesn’t let you see the graphics, videos, and PDFs that you want to assemble into your presentation. Unlike on the Mac, there’s no Finder, no place where you can see “everything” at one glance. Even more important, there’s no natural way to combine heterogeneous documents into one.

On the other hand, we all know users who love the iPad for its simplicity. They can download and play music, read books, respond to email and tweets, view photos, and stream movies without having to navigate a file hierarchy. For them, the notion of a “file system” is neither natural nor trivial — it’s foreign and geeky. Why throw them into a maze of folders and files?

Apple’s decision to hide the iOS file system from iPad (and iPhone) users comforts the non-geek and is consistent with Steve Jobs’ idea that applications such as Mail, iTunes, iPhoto, iCal, and Contacts shouldn’t reveal their files and folders. Under the hood, the application stores its data in the Mac’s file system but, on the surface, the user sees appointments, photo albums and events, mailboxes and messages.

Still, some of us see this as the storage equivalent of Seinfeld’s Soup Nazi: No File System For You!

App developers and customers keep trying. iOS apps such as GoodReader and File Manager Pro valiantly attempt to work around the iPad strictures. PhoneView will expose and manipulate your iPad’s file system (not recommended). But success with any of these apps is limited and comes at a price: The iPad’s simplicity and fluidity is long gone by the time you achieve the desired result, the multimedia brochure or HR tutorial.

This places Apple at a fork on the road. On the left is the current path: more/better/lighter/faster of the same. Only evolutionary changes to the simple and successful worldview. This is today’s trajectory, validated by history (think of the evolution of the MacBook) and strong revenue numbers.

On the right, Apple could transform the iPad so that power users can see and combine data in ways that are impossible today. This could attract business customers who are hesitant about making the plunge into the world of tablets, or who may be considering alternatives such as Microsoft’s PC/tablet combo or Android devices with Google services.

The easiest decision is no decision. Let’s have two user interfaces, two modes: The Easy mode for my Mother-In-Law, and the Pro Mode for engineers, McKinsey consultants, and investment bankers. Such dual-mode systems haven’t been very popular so far, it’s been tried without success on PCs and Macs. (Re-reading this, I realize the Mac itself could be considered such a dual-mode machine: Fire up the Terminal app and you have access to a certified Unix engine living inside…)

The drive to “pervert” the iPad is unmistakable. I think it will prove irresistible in the end. But I have trouble forming a coherent picture of an evolution that would let Apple open the iPad to more demanding users — without sacrificing its great simplicity and falling into the fridge + toaster trap.
It’s a delicate balancing act.

– JLG@mondaynote.com

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The survival of quality news calls for a new approach to writing and reporting. Inspiration could come from blogging and magazine storytelling and also bring back memories of the 70′s New Journalism movement. 

News reporting is aging badly. Legacy newsrooms style books look stuck in a last Century formalism (I was tempted to write “formalin“). Take a newspaper, print or online. When it comes news reporting, you see the same old structure dating back to the Fifties or even earlier. For the reporter, there is the same (affected) posture of effacing his/her personality behind facts, and a stiff structure based on a string of carefully arranged paragraphs, color elements, quotes, etc.

I hate useless quotes. Most often, for journalists, such quotes are the equivalent of the time-card hourly workers have to punch. To their editor, the message is ‘Hey, I did my my job; I called x, y, z’ ; and to the  the reader, ‘Look, I’m humbly putting my personality, my point of view behind facts as stated by these people’ — people picked by him/herself, which is the primary (and unavoidable) way to twist a story. The result becomes borderline ridiculous when, after a lengthy exposé in the reporter’s voice to compress the sources’ convoluted thoughts, the line of reasoning concludes with a critical validation such as :

“Only time will tell”, said John Smith, director of the social studies at the University of Kalamazoo, consultant for the Rand Corporation, and author of “The Cognitive Deficit of Hyperactive Chimpanzees”. 

I’m barely making this up. Each time I open a carbon-based newspaper (or read its online version), I’m stuck by how old-fashioned news writing remains. Unbeknownst to the masthead (i.e. editorial top decision-makers) of legacy media, things have changed. Readers no longer demand validating quotes that weigh the narrative down. They want to be taken from A to B, with the best possible arguments, and no distraction or wasted time.

Several factors dictate an urgent evolution in the way newspapers are written.

1/ Readers’ Time Budget. People are deluged with things to read. It begins at 7:00 in the morning and ends up late into the night. The combination of professional contents (mail, reports, PowerPoint presentations) and social networking feeds, have put traditional and value-added contents (news, books) under great pressure. Multiple devices and the variable level of attention that each of them entails create more complications: a publishing house can’t provide the same content for a smartphone screen to be read in a cramped subway as for a tablet used in lean-back mode at home. More than ever, the publisher is expected to clearly arbitrate between the content that is to be provided in a concise form and the one that justifies a long, elaborate narrative. The same applies to linking and multi-layer constructs: reading a story that opens several browser tabs on a 22-inch screen is pleasant — and completely irrelevant for quick lunchtime mobile reading.

2/ Trust factor / The contract with the Brand. When I pick a version of The New York Times, The Guardian, or a major French newspaper, this act materializes my trust (and hope) in the professionalism associated with the brand. In a more granular way, it works the same for the writer. Some are notoriously sloppy, biased, or agenda-driven; others are so good than they became a brand by themselves. My point: When I read a byline I trust, I assume the reporter has performed the required legwork — that is collecting five or ten times the amount of information s/he will use in the end product. I don’t need the reporting to be proven or validated by an editing construct that harks back to the previous century. Quotes will be used only for the relevant opinion of a source, or to make a salient point, not as a feeble attempt to prove professionalism or fairness.

3 / Competition from the inside. Strangely enough, newspapers have created their own gauge to measure their obsolescence. By encouraging their writing staff to blog, they unleashed new, more personal, more… modern writing practices. Fact is, many journalists became more interesting on their own blogs than in their dedicated newspaper or magazine sections. Again, this trend evaded many editors and publishers who consider blogging to be a secondary genre, one that can be put outside a paywall, for instance. (This results in a double whammy: not only doesn’t the paper cash on blogs, but it also frustrates paid-for subscribers).

4/ The influence of magazine writing. Much better than newspapers, magazines have always done a good job capturing readers’ preferences. They’ve have always been ahead in market research, graphic design, concept and writing evolution. (This observations also applies to the weekend magazines operated by large dailies). As an example, magazine writers have been quick to adopt first person accounts that rejuvenated journalism and allowed powerful narrative. In many newspapers, authors and their editors still resists this.

Digital media needs to invent its own journalistic genres. (Note the plural, dictated by the multiplicity of usages and vectors). The web and its mobile offspring, are calling for their own New Journalism comparable to the one that blossomed in the Seventies. While the blogosphere has yet to find its Tom Wolfe, the newspaper industry still has a critical role to play: It could be at the forefront of this essential evolution in journalism. Failure to do so will only accelerate its decline.

– frederic.filloux@mondaynote.com

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Rumors don’t actual Apple products make, see the perennial Apple TV — and the latest iWatch rumors. This is an opportunity to step back, look at Apple’s one and only love –personal computers — and use this thought to sift through rumors. 

Every week brings new rumors of soon-to-be-released Apple products. The mythical Apple TV set is always a favorite: Gossip of an Apple buyout of troubled TV maker Löwe has sent the German company’s stock soaring. We also hear of a radio streaming service that will challenge Pandora and Spotify, and there’s the usual gaggle of iPhone, iPad, and Mac variations. More interesting is the racket surrounding Apple’s “stealth” projects:  an iWatch and other wearable devices (and “racket” is the right word — see these intimations of stock manipulation).

There is a way to see through the dust, to bring some clarity, to organize our thoughts when considering what Apple might actually do, why the company would (or wouldn’t) do it, and how a rumored product would fit into the game plan.

The formula is simple: Apple engineers may wax poetic about the crystalline purity of the software architecture, execs take pride in the manufacturing chain and distribution channels (and rightly so), marketing can point to the Apple Customer Experience (when they’re not pitching regrettable Genius ads or an ill-timed campaign featuring Venus and Serena Williams). But what really floats their bots, what hardens Apple’s resolve is designing, making, and selling large numbers of personal computers, from the traditional desktop/laptop Mac, to the genre-validating iPad, and on to the iPhone — the Very Personal Computer. Everything else is an ingredient, a booster, a means to the noblest end.

Look at Apple’s report to its owners: there’s only one Profit and Loss (P&L) statement for the entire $200B business. Unlike Microsoft or HP, for example, there is no P&L by division. As Tim Cook put it:

We manage the company at the top and just have one P&L and don’t worry about the iCloud team making money and the Siri team making money…we don’t do that–we don’t believe in that…

Apple’s appreciation for the importance and great economic potential of personal computers — which were invented to act as dumb servants to help us with data storage, text manipulation, math operations — may have been, at first, more instinctual than reasoned. But it doesn’t matter; the company’s monomania, it’s collective passion is undeniable. More than any other company, Apple has made computers personal, machines we can lift with our hands and our credit cards.

With these personal computer glasses on, we see a bit more clearly.

For example: Is Apple a media distribution company? Take a look at Apple’s latest 10-Q SEC filing, especially the Management Discussion and Analysis (MD&A) section starting page 21. iTunes, now reported separately, clocked $3.7B for the last quarter of 2012.  Elsewhere, Horace Dediu sees $13.5B for the entire year. A big number indeed, and, certainly, iTunes is a key to Apple’s success: Without iTunes there would have been no iPod, Apple’s “halo product“, proof that the company could come up with a winner.  Later, iTunes begat the App Store, a service that solidified the App Phone genre.

Some misguided analysts look at the numbers and argue that Apple ought to spin off iTunes. They use the old “shareholder value” gambit, but the “value” simply isn’t there: Horace Dediu puts iTunes margins in the 15% region, well below Apple’s overall 38%. iTunes is a hugely important means to the personal computer end, but it’s not a separate business.

How about Apple as a retail company? The success of the Apple Store is stellar, a word that’s almost too weak: The Apple Stores welcomed three times more visitors than all of the Disney parks, and generated more than $20B in revenue last year — that works out to an astonishing $6000 per square foot, twice as much as the #2 shop (Tiffany and Co.). But Apple’s 400 stores aren’t a business, they only exist to create an experience that will lead to more sales, enhanced customer satisfaction, and, as a consequence, increased margins.

Apple as a software company? No. The raison d’être for OS X, iOS, iWork, and even Garage Band is to breathe life into Apple hardware. By now, the calls for Apple to see the error of its ways, to not repeat the original sin of not licensing Mac OS, to sell iOS licenses to all comers have (almost) died.
During my first visit to Apple’s hypergalactic headquarters and warehouse in February 1981, I was astonished at the sight of forklifts moving pallets of Apple ][ software. The term “ecosystem” wasn’t part of the industry lingo yet, but I had witnessed the birth of the notion.
Apple had a much harder time building a similarly rich set of applications for the Macintosh, but the lesson was eventually learned, partly due to the NeXT acquisition and the adoption of object oriented programming. We now have a multi-dimensional macrocosm — a true ecosystem — in which our various forms of personal computing work together, share data, media, services.

Where does the current Apple TV device (the black puck, not the mythical TV set) fit into this scheme? Apple TV runs on a version of iOS, and it knows how to communicate with a Bluetooth keyboard — but that doesn’t mean the device is a personal computer. Perhaps Apple will (someday) provide a TV Software Development Kit (SDK) so developers can adapt existing iOS apps or write new ones. But I still see it as a lean-back device, as opposed to a lean-forward PC.

In any case, sales of the $100 black puck don’t move the needle. Four million Apple TVs were sold in 2012; even if ten million are sold this year — and that’s a very optimistic estimate — it won’t make a noticeable difference, at least not directly. Apple TV is a neat part of the ecosystem, it makes iPhones, iPads, Macs and our iTunes libraries more valuable, but it’s still just a member of the supporting cast.

This brings us back to the putative iWatch. Computer history buffs will recall the HP 01 watch. Buoyed by the success of its handheld calculators, including the programable HP 65 with its magnetic card reader, HP convinced itself it could make a calculator watch, introduced in 1977:

A technology tour de force, fondly remembered by aging geeks, but a market failure: too expensive, too hard to use, ill-fitting distribution channels.

Apple is in a different spot. Today, you can find a number of iPod watchbands such as this one:

It’s hard to imagine that Apple would merely integrate an existing accessory into a new iPod. Sales of the iPod proper are decelerating, so the iPod-as-iWatch could give the line a much needed boost, but it’s difficult to reconcile the rumors of “100 people” working on the project if it’s just a retrofit job. Is Apple working on an iWatch that can be experienced as an Even More Personal personal computer — an “intimate computer”? If so, many questions arise: user interface, sensors, iOS version, new types of apps, connection with other iDevices… And, of course price.

This would be much more interesting than the perennially in-the-future Apple TV set. Of course, iWatch and Apple TV aren’t necessarily mutually exclusive. If the Löwe buyout rumors are true, Apple could do both — the company could develop its own watch device and repurpose Löwe’s TV. (I still doubt the TV set part, as opposed to enhancing the black puck.)

But once we understand what Apple’s only business is, and that the related software, retail, and services are simply part of the supporting cast, Apple’s attitude towards big acquisitions becomes clearer. Apple isn’t looking at buying a big new business, it already owns The Big One. So, no movie studio, no retail chain or cable company, no HP or Dell, or Yahoo!. (But… a big law firm, perhaps?) Integrating a large group of people into Apple’s strong, unbending culture would, alone, prove to be impossible.

A small acquisition to absorb technology (and talented people) makes sense. The cultural integration risks remain, but at a manageable scale, unlike what happened to Exxon in the early eighties when it burned $4B (that was real money, then) in a failed attempt to become an information systems company — you know, the Oil of the Twenty-First Century.

Let’s just hope Apple doesn’t talk itself into a “because we can” move.

– JLG@mondaynote.com

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Looking for next big wave of products or services, for something as big as smartphones or, more recently, tablets, we see technology kept in check by culture.

To qualify as a Big Thing these days, a product — or a service, or maybe something hardly more effable than a meme (think “social networks”) — has to assume a value on the order of $100B worldwide. The value needn’t be concentrated in a single company; indeed, the more boats that are lifted by the rising tide, the better. The revenue from the Next Big Thing might be divvied up among today’s hardware and software giants or shared with companies that are currently lurking under the radar of industry statistics.

The $100B number is derived from a look at Apple. For Fiscal Year 2013 (started October 1st, 2012), the company will weigh about $200B in revenue. To “move the needle” for just this one company, a Big Thing will need to contribute about $20B to this total. For Apple execs and shareholders, anything less counts as a mere hobby (which leads to questions about the future of the Mac, but I digress).

Using this gauge, smartphones easily qualify as a Big Thing. As Charles Arthur reports in The Guardian: Mobile internet devices ‘will outnumber humans this year‘. Initially offered by Palm, Microsoft, RIM, and Nokia, and then given successive boosts by the iPhone (first with the device itself and then the App Store), it’s no exaggeration to say that the size of the smartphone tsunami surprised everyone. Even the Big Four incumbents were crushed by the wave: Palm is gone, RIM is in trouble, and Nokia has enslaved itself to Microsoft — which has yet to come up with a viable smartphone OS.

The latest Big Thing is, of course, the “media tablet” (as IDC and Gartner obsessively call the iPad and its competitors). Whatever you call it, regardless of who makes it or which OS it runs, the tablet is a Big Thing that just keeps getting bigger. In less than five years, tablets have attained 10% US market penetration, a milestone that smartphones took eight years to reach. (See also slide 9 in Mary Meeker’s now iconic Internets Trends presentation.)

In his February 7th Apple 2.0 post, Philip Elmer-DeWitt offers this Canalys chart, which shows that one in six “PCs” shipped in Q4 2012 was an iPad:

So what’s next? Is there a breakthrough technology quietly germinating somewhere? What are the obstacles to a self-amplifying chain of events?

I don’t think the barriers to the Next Big Thing are technical. The ingredients are there, we simply need a master chef to combine them.

This brings us to the broad — and fuzzy — class of what is sometimes called “smart appliances.”

The underlying idea is that the devices that surround us — alarm systems, heaters and air conditions, televisions, stereos, baby monitors, cars, home health-care devices — should be automated and connected. And we should be able to control them through a common, intuitive UI — in other words, they should speak our language, not the other way around.

This isn’t a new idea. For decades now, we’ve been told the Smart Home is upon us, a fully automated, connected, secured, and energy-saving dwelling. More than 20 years ago, Vint Cerf, an Internet progenitor and now Google’s Chief Internet Evangelist, posed with a t-shirt featuring the famous IP On Everything pun:

The Internet visionary was and is right: Every object of importance is destined to have an “IP stack“, the hardware, software, and communication link required to plug the device into the Internet. With every turn of Moore Law’s crank, the hardware becomes smaller, less expensive and power-hungry, and thus makes more room for better software, allowing Internet (and local) connectivity to potentially “infect” a growing number of devices. And as devices become smart, they will “teach” each other how to communicate.

Imagine: You take a new remote control out of the box, walk up to a TV and press the “?”  key on the remote. A standardized “teach me” message is broadcast, and the TV responds, wirelessly, by sending back a longish XML file that identifies itself and tells the remote the commands it understands:

In a language that computers — and even humans — can process without too much effort, the TV has taught the remote: Here is where you’ll find me, and this is how you can talk to me. The little computer inside the remote munges the file and now the device knows how to control the TV…or the five components of the home theater, the heater/air conditioner, the alarm system, the car…

Now replace the remote in this scenario with your tablet, with its better UI, processing, and connectivity. Rather than controlling your devices by pushing plastic buttons, you use an app on your tablet — an app that the device delivered just before it sent the XML file. (You can use the default app sent by the device, or wander over to the App Store and pay $5 for a deluxe version with different skins. This is how cottage industries are born.)

So goes the lovely theory… but in reality we see so-called Smart TVs with Internet connections but mediocre UI; or less-smart TVs that are still bound to barely intelligent set-top boxes, with their Trabant-grade user experience. And we control them through multi-function “universal” remotes that cost as much as a smartphone, but that do less and do it less well.

What’s missing?

The technological building blocks exist in abundance. There is plenty of Open Source software available to help the remote (or your tablet) digest the This Is How To Talk To Me file from the TV.

Even in our deliberately simplified example, there seems to be no interest in coming up with a simple, open (yes, that word, again) standard to help appliances tell the rest of the world how to control them. It wouldn’t add much to the cost of the device and certainly wouldn’t require hiring rocket scientists. In other words, the obstacles are neither economical nor technical; they’re cultural, they’re keeping the Machine To Machine (M2M) revolution in check.

We’ve seen a similar sort of cultural resistance when we consider à la carte, app-based channels on the mythical “iTV”, whether from Apple, Google, or anyone else. Users would love to pick and chose individual shows and have them delivered through applications rather than through deaf-and-dumb multicast streams. App-ification of TV content would provide other “organic” features: the ability to rewind a live broadcast (without a DVR), easy search through program archives, access to user forums and behind-the-scenes commentary…

The technology and design already exist, as the wonderful 60 Minutes iPad app demonstrates:

Similar examples can be found on every internet-enabled TV platform from Google TV to Roku, the Xbox, and others.

Nice, easy, technically feasible yesterday…but it’s impossible today and will almost certainly continue to be impossible for the near future (I first typed nerd future, a neat typo).

Why?

Because carriers won’t allow it. They’re terrified of becoming dumb pipes (the link refers to mobile carriers but the idea also applies to cable and satellite providers). Carriers force us to buy bundles of channels that they package and sell in a tiered, take-it-or-leave it pricing scheme. True, there is VOD (Video On Demand) where we can buy and view individual movies or premium sporting events, but a pervasive newsstand model where we only pay for what we consume is still far away.

The content owners — movie studios and TV networks — don’t like the newsstand model either. They go by the old Hollywood saying: Content is King, but Distribution is King Kong. iTunes made an impression: Movie and TV studios don’t want to let Google, Apple, Netflix, or Amazon run the table the way Apple did with iTunes and AT&T. (That AT&T derived lasting benefits in higher ARPU and market share doesn’t seem to alleviate the content providers’ fears.)

How can this change and, as a result, unlock one or two Big Things? To retread a famous two-part Buddhist joke, change is a mysterious thing. Telling people what they ought to do doesn’t always work. Still, two thoughts come to mind.

First, the tablet. We, Tech People have always known the tablet was the right thing to do, and we tried for thirty years without much success. Three years ago, Chef Jobs grabbed the ingredients that had been available to all and, this time, the tablet genre “took”. Now, perhaps, the tablet will take its place as an ingredient in a yet grander scheme.

Second, go to an aquarium and watch a school of fish. They move in concert and suddenly turn for no apparent reason. Somewhere inside the school there must have been a “lead fish” that caused the change of direction. Perhaps the fish didn’t even realize he was The One destined to trigger the turn.

Who’s going to be our industry’s fish, big or small, that precipitates a cultural change unlocking the potential of existing technologies and gives rise to the next $100B opportunity?

– JLG@mondaynote.com

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At the last minute, ending three months of  tense negotiations, Google and the French Press hammered a deal. More than yet another form of subsidy, this could mark the beginning of a genuine cooperation.

Thursday night, at 11:00pm Paris time, Marc Schwartz, the mediator appointed by the French government got a call from the Elysée Palace: Google’s chairman Eric Schmidt was en route to meet President François Hollande the next day in Paris. They both intended to sign the agreement between Google and the French press the Friday at 6:15pm. Schwartz, along with Nathalie Collin, the chief representative for the French Press, were just out of a series of conference calls between Paris and Mountain view: Eric Schmidt and Google’s CEO Larry Page had green-lighted the deal. At 3 am on Friday, the final draft of the memorandum was sent to Mountain View. But at 11:00am everything had to be redone: Google had made unacceptable changes, causing Schwartz and Collin to  consider calling off the signing ceremony at the Elysée. Another set of conference calls ensued. The final-final draft, unanimously approved by the members of the IPG association (General and Political Information), was printed at 5:30pm, just in time for the gathering at the Elysée half an hour later.

The French President François Hollande was in a hurry, too: That very evening, he was bound to fly to Mali where the French troops are waging as small but uncertain war to contain Al-Qaeda’s expansion in Africa. Never shy of political calculations, François Hollande seized the occasion to be seen as the one who forced Google to back down. As for Google’s chairman, co-signing the agreement along with the French President was great PR. As a result, negotiators from the Press were kept in the dark until Eric Schmidt’s plane landed in Paris Friday afternoon and before heading to the Elysée. Both men underlined what  they called “a world premiere”, a “historical deal”…

This agreement ends — temporarily — three months of difficult negotiations. Now comes the hard part.

According to Google’s Eric Schmidt, the deal is built on two stages:

“First, Google has agreed to create a €60 million Digital Publishing Innovation Fund to help support transformative digital publishing initiatives for French readers. Second, Google will deepen our partnership with French publishers to help increase their online revenues using our advertising technology.”

As always, the devil lurks in the details, most of which will have to be ironed over the next two months.

The €60m ($82m) fund will be provided by Google over a three-year period; it will be dedicated to new-media projects. About 150 websites members of the IPG association will be eligible for submission. The fund will be managed by a board of directors that will include representatives from the Press, from Google as well as independent experts. Specific rules are designed to prevent conflicts of interest. The fund will most likely be chaired by the Marc Schwartz, the mediator, also partner at the global audit firm Mazars (all parties praised him for his mediation and wish him to take the job).

Turning to the commercial part of the pact, it is less publicized but at least as equally important as the fund itself. In a nutshell, using a wide array of tools ranging from advertising platforms to content distribution systems, Google wants to increase its business with the Press in France and elsewhere in Europe. Until now, publishers have been reluctant to use such tools because they don’t want to increase their reliance on a company they see as cold-blooded and ruthless.

Moving forward, the biggest challenge will be overcoming an extraordinarily high level distrust on both sides. Google views the Press (especially the French one) as only too eager to “milk” it, and unwilling to genuinely cooperate in order to build and share value from the internet. The engineering-dominated, data-driven culture of the search engine is light-years away from the convoluted “political” approach of legacy media that don’t understand or look down on the peculiar culture of tech companies.

Dealing with Google requires a mastery of two critical elements: technology (with the associated economics), and the legal aspect. Contractually speaking, it means transparency and enforceability. Let me explain.

Google is a black box. For good and bad reasons, it fiercely protects the algorithms that are key to squeezing money from the internet, sometimes one cent at a time — literally. If Google consents to a cut of, say, advertising revenue derived from a set of contents, the partner can’t really ascertain whether the cut truly reflects the underlying value of the asset jointly created – or not. Understandably, it bothers most of Google’s business partners: they are simply asked to be happy with the monthly payment they get from Google, no questions asked. Specialized lawyers I spoke with told me there are ways to prevent such opacity. While it’s futile to hope Google will lift the veil on its algorithms, inserting an audit clause in every contract can be effective; in practical terms, it means an independent auditor can be appointed to verify specific financial records pertaining to a business deal.

Another key element: From a European perspective, a contract with Google is virtually impossible to enforce. The main reason: Google won’t give up on the Governing Law of a contract that is to be “Litigated exclusively in the Federal or States Courts of Santa Clara County, California”. In other words: Forget about suing Google if things go sour. Your expensive law firm based in Paris, Madrid, or Milan will try to find a correspondent in Silicon Valley, only to be confronted with polite rebuttals: For years now, Google has been parceling out multiples pieces of litigation among local law firms simply to make them unable to litigate against it. Your brave European lawyer will end up finding someone that will ask several hundreds thousands dollars only to prepare but not litigate the case. The only way to prevent this is to put an arbitration clause in every contract. Instead of going before a court of law, the parties agrees to mediate the matter through a private tribunal. Attorneys say it offers multiples advantages: It’s faster, much cheaper, the terms of the settlement are confidential, and it carries the same enforceability as a Court order.

Google (and all the internet giants for that matter) usually refuses an arbitration clause as well as the audit provision mentioned earlier. Which brings us to a critical element: In order to develop commercial relations with the Press, Google will have to find ways to accept collective bargaining instead of segmenting negotiations one company at a time. Ideally, the next round of discussions should come up with a general framework for all commercial dealings. That would be key to restoring some trust between the parties. For Google, it means giving up some amount of tactical as well as strategic advantage… that is part of its long-term vision. As stated by Eric Schmidt in its upcoming book “The New Digital Age” (the Wall Street Journal had access to the galleys) :

“[Tech companies] will also have to hire more lawyers. Litigation will always outpace genuine legal reform, as any of the technology giants fighting perpetual legal battles over intellectual property, patents, privacy and other issues would attest.”

European media are warned: they must seriously raise their legal game if they want to partner with Google — and the agreement signed last Friday in Paris could help.

Having said that, I personally believe it could be immensely beneficial for digital media to partner with Google as much as possible. This company spends roughly two billion dollars a year refining its algorithms and improving its infrastructure. Thousands of engineers work on it. Contrast this with digital media: Small audiences, insufficient stickiness, low monetization plague both web sites and mobile apps; the advertising model for digital information is mostly a failure — and that’s not Google’s fault. The Press should find a way to capture some of Google’s technical firepower and concentrate on what it does best: producing original, high quality contents, a business that Google is unwilling (and probably culturally unable) to engage in. Unlike Apple or Amazon, Google is relatively easy to work with (once the legal hurdles are cleared).

Overall, this deal is a good one. First of all, both sides are relieved to avoid a law (see last Monday Note Google vs. the press: avoiding the lose-lose scenario). A law declaring that snippets and links are to be paid-for would have been a serious step backward.

Second, it’s a departure from the notion of “blind subsidies” that have been plaguing the French Press for decades. Three months ago, the discussion started with irreconcilable positions: publishers were seeking absurd amounts of money (€70m per year, the equivalent of IPG’s members total ads revenue) and Google was focused on a conversion into business solutions. Now, all the people I talked to this weekend seem genuinely supportive of building projects, boosting innovation and also taking advantage of Google’s extraordinary engineering capabilities. The level of cynicism often displayed by the Press is receding.

Third, Google is changing. The fact that Eric Schmidt and Larry Page jumped in at the last minute to untangle the deal shows a shift of perception towards media. This agreement could be seen as a template for future negotiations between two worlds that still barely understand each other.

– frederic.filloux@mondaynote.com

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The iPad started simple, one window at a time, putting it in the “media consumption” category as a result. Over time, such category proved too narrow, the iPad did well in some content creation activities. Can the new 128 GB iPad continue the trend and acquire better workflow capabilities?

Last week, without great fanfare, Apple announced a new 128 GB version of its fourth generation iPad, a configuration popularly known as the “iPad Pro“. The “Pro” monicker isn’t official, but you wouldn’t know that from Apple’s press release:

Companies regularly utilizing large amounts of data such as 3D CAD files, X-rays, film edits, music tracks, project blueprints, training videos and service manuals all benefit from having a greater choice of storage options for iPad. 

Cue the quotes from execs at seriously data storage-intense companies such as AutoCAD; WaveMachine Labs (audio software); and, quirkily, Global Aptitude, a company that makes film analysis software for football teams:

“The bottom line for our customers is winning football games, and iPad running our GamePlan solution unquestionably helps players be as prepared as possible,” said Randall Fusee, Global Apptitude Co-Founder. 

The naysayers grumble: Who needs this much memory on a “media tablet”? As Gizmodo put it:

The new iPad has the same retina display as its brothers, and the same design, and the same guts, with one notable exception: a metric crap-ton of storage. More storage than any decent or sane human being could ever want from a pure tablet…

(Increased storage is…indecent? This reminds me of the lambasting Apple received for putting 1 — one! — megabyte of memory in the 1986 Mac Plus. And we all recall Bill Gates’ assertion that 640 Kbytes ought to be enough for anyone. He now claims that the quote is apocryphal, but I have a different recollection.)

Or maybe this is simply Apple’s attempt to shore up the iPad’s average selling price ($467, down 18% from the year ago quarter), which took a hit following the introduction of the lower-priced iPad mini. (What? Apple is trying to make more money?)

The critics are right to be skeptical, but they’re questioning the wrong part of the equation.

When we compare iPad prices, the Pro is a bargain, at least by Apple standards:

The jump from 16GB to 32GB costs $100. Another doubling to 64GB costs the same $100. And, on February 5th, you’ll get an additional 64GB for yet another mere $100. (By comparison, extra solid state storage on a MacBook costs between $125 and $150 per 64GB.)

We get a bit more clarity when we consider the iPad’s place in Apple’s product line: As sales of the Mac slow down, the iPad Pro represents the future. Look at Dan Frommer’s analysis of 10 years of Mac sales. First, the Mac alone:

This leads Dan to ask if the Mac has peaked. Mac numbers for the most recent quarter  were disappointing. The newer iMacs were announced in October, with delivery dates in November and December for the 21.5″ and 27″ models respectively. But Apple missed the Xmas quarter window by about a million units, which cut revenue by as much as $1.5B and margin by half a billion or so (these are all very rough numbers). We’ll probably never find out how Apple’s well-oiled Supply Chain Management machine managed to strip a gear, but one can’t help wonder who will be exiled to Outer Mongolia Enterprise Sales.

Now consider another of Dan Frommer’s graphs:

This is units, not revenue. Mac and iPad ASPs are a 3 to 1 ratio but, still, this paints a picture of a slow-growth Mac vs. the galloping iPad.

The iPad — and tablets in general — are usurping the Mac/PC space. In the media consumption domain, the war is all but won. But when we take a closer look at the iPad “Pro”, we see that Apple’s tablet is far from realizing its “professional” potential.

This is where the critics have it wrong: Increased storage isn’t “insane”, it’s a necessary element…but it isn’t sufficient.

For example, can I compose this Monday Note on an iPad? Answering in the affirmative would be to commit the Third Lie of Computing: You Can Do It. (The first two are Of Course It’s Compatible and Chief, We’ll be in Golden Master by Monday.)

I do research on the Web and accumulate documents, such as Dan Frommer’s blog post mentioned above. On a PC or Mac, saving a Web page to Evernote for future reference takes a right click (or a two finger tap).

On an iPad, things get complicated. The Share button in Safari gives me two clumsy choices: I can mail the page to my Evernote account, or I can Copy the URL, launch Evernote, paste the URL, compose a title for the note I just created, and perhaps add a few tags.

Once I start writing, I want to look through the research material I’ve compiled. On a Mac, I simply open an Evernote window, side-by-side with my Pages document: select, drag, drop. I take some partial screenshots, annotate graphs (such as the iPad Pro prices above), convert images to the .png format used to put the Monday Note on the Web…

On the iPad, these tasks are complicated and cumbersome.

For starters — and to belabor the obvious — I can’t open multiple windows. iOS uses the “one thing at a time” model. I can’t select/drag/drop, I have to switch from Pages to Evernote or Safari, select and copy a quote, and then switch back to the document and paste.

Adding a hyperlink is even more tortuous and, at times, confusing. I can copy a link from Safari, switch back to Pages, paste…but I want to “slide” the link under a phrase. I consult Help, which suggests that I tap on the link, to no avail. If I want to attach a link to a phrase in my document, I have to hit the Space key after pasting, go to Settings and then enter the text that will “cover” the link — perfectly obvious.

This order of operations is intuitively backwards. On a Mac (or PC), I select the target text and then decide which link to paste under it.

Things get worse for graphics. On the iPad, I can’t take a partial screenshot. I can take a full screenshot by simultaneously pressing the Home and Sleep buttons, or I can tap on a picture in Safari and select Save. In both cases, the screenshot ends up in the Photos app where I can perform some amount of cropping and enhancing, followed by a Copy, then switch back to Pages and Paste into my opus.

Annotations? No known way. Control over the image file format? Same answer. There’s no iPad equivalent to the wonderful Preview app on the Mac. And while I’m at it, if I store a Preview document in iCloud, how do I see it from my iPad?

This gets us into the more general — and “professional” — topic of assembling a trove of parts that can be assembled into a “rich” document, such as a Keynote presentation. On a personal computer, there are plenty of choices. With the iPad, Apple doesn’t provide a solution, there’s no general document repository, no iCloud analog to Dropbox or Microsoft’s Skydrive, both of which are simple to use, quasi-free and, in my experience, quite reliable. (One wonders: Is the absence of a Dropbox-like general documents folder in iCloud a matter of technology or theology?)

Simply throwing storage at the problem is, clearly, not enough to make the iPad a “Pro” device.  But there is good news. Some of it is anecdotal, such as the more sophisticated editing provided by the iPad version of iPhoto. The better news is that iOS is a mature, stable operating system that takes advantage of fast and spacious hardware.

But the best news is that Apple has, finally, some competition when it comes to User Experience. For example, tablets that run Microsoft or Google software let users slide the current window to show portions of another one below, making it easier to select parts of a document and drop them into another. (Come to think of it, the sliding Notifications “drawer” on the iPad and iPhone isn’t too far off.)

This competition might spur Apple to move the already very successful iPad into authentically “Pro” territory.

The more complex the task, the more our beloved 30-year-old personal computer is up to it. But there is now room above the enforced simplicity that made the iPad’s success for UI changes allowing a modicum of real-world “Pro” workflow on iPads.

– JLG@mondaynote.com

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To perform painful surgery on its business model, Dell needs to take the company private. Seeing challenges in raising the needed $22B, Microsoft “generously” proposes to contribute a few billions. Is this helping or killing the deal?

The news broke two weeks ago: Dell wants to go private. The company would like to buy back all of its publicly traded shares.

The Apple forums are abuzz with memories of Michael Dell’s dismissal of Steve Jobs’ efforts to breathe new life into Apple in 1997:

What would I do? I’d shut it down and give the money back to the shareholders.

Is it now Michael’s turn to offer a refund?

Now we hear that Microsoft wants to lend a hand, as in “several billion dollars”. The forums buzz again: It’s just like when Bill Gates came to Jobs’ rescue and invested $150M in the Cupertino company, thus avoiding a liquidity crisis.

The analogy is amusing but facile. Dell 2013 isn’t Apple 1997. A look at Dell’s latest financials shows that the company still enjoys a solid cash position ($14B) and a profitable business (3.5% net profit margin). It’s profits may not be growing (-11% year to year), but the company is cash-flow positive nonetheless ($1.3B from the latest quarter). There’s no reason to fold up the tents.

As for Microsoft’s involvement: The Redmond company’s “investment” in Apple was part of a settlement of an on-going IP dispute. Microsoft avoided accusations of monopoly by keeping alive a highly visible but not overly dangerous adversary.

So what is Dell trying to accomplish by going private? To answer the question, let’s step back a bit and explore the whys and hows of such a move.

First, we have the Management Buyout. Frustrated with Wall Street’s low valuation, executives buy back their company “on the cheap” and run it in private for their own benefit. This rarely ends well.  Second-guessing the market is never a good idea, and the enormous amount of money that’s needed to pay off shareholders puts the execs at the mercy of bigger, smarter predators who turn out to be the ones who end up running the company for their benefit.

A good reason for going private is to allow a company to shift to a radically different business model without being distracted by Wall Street’s annoying glare and hysterics. This is what Dell is trying to do. They’re not shutting down shop, they’re merely closing the curtain.

Is it necessary to privatize for such a move? For an example that never came to pass, recall Bill Gates’ suggestion, in 1985, that Apple should get out of the hardware business and, instead, license the Mac operating system. At the time, the average revenue per Mac exceeded $2,500; a putative Mac OS license would have sold for $100. The theory was that Apple would eventually sell many, many more OS licenses than it did Macs.

The pundits agreed: “Just look at Microsoft!”.  Apple would jump from one slowly ascending earnings curve to a much steeper one.

Now picture yourself as John Sculley, Apple CEO, going to Wall Street with the following message: “We heard you, we’ve seen the light. Today, we’re announcing a new era for our company, we’ll be licensing Mac OS licenses to all comers for $100 apiece. Of course, there’ll be a trough; licensing revenue won’t immediately compensate the loss of Mac hardware sales. We need am ‘earnings holiday’ of about 36 months before the huge software profits flow in.”

You just became the ex-CEO. Wall Street dumps your shares, effectively telling you to take them back and only return after your “holiday” is over.

As another example that didn’t happen but probably should have, imagine if Nokia CEO Stephen Elop had taken his company private in 2011. Instead of osborning its Symbian business, Nokia would have had the latitude to perform the OS gender change behind closed doors and reemerge with a shiny new range of Microsoft-powered smartphones.

I’ll hasten to add that these made-up examples are somewhat unrealistic: To engineer a buyout, one must raise amounts of money commensurate with the company’s current valuation. Around 1987, Apple was worth about $2B, a great deal of money a quarter of century ago. In early 2011, Nokia’s market capitalization was about $40B, an impossibly large sum.

Still, thanks to these buyout fantasies, we get the two key ideas: First, Dell wants to go private because it plans to alter its business model in ways that would scare nervous, short-term Wall Street shareholders; second, the required amount of money (Dell’s market cap is about $22B) is a potential deal-killer.

We don’t have to look very far for the changes Dell wants to make. Dell no longer likes its legacy PC business and has made efforts to reposition itself as an enterprise player (expensive iron, software and services). Going private will allow it to perform the needed surgery, stanch the bleeding, and reemerge with a much stronger income statement, rid of low-margin commodity PCs.

When we look at the money that needs to be raised, things become really interesting. Michael Dell’s 15.7% ownership of the company undoubtedly helps, but the $22B market cap is still a big hill to climb. Several buyout firms and banks got involved in preliminary discussions; one group, TPG Capital, dropped out, but another, Silver Lake, has persisted in its attempt to round up big banks and other investors with enough funds to vacuum up Dell’s publicly traded shares.

That’s when Microsoft walks in on the discussions and offers to save Private Dell.

Clearly, Microsoft’s money will help in the buyout…but will its involvement torpedo Dell’s intentions? The NY Times DealBook article makes the case for Microsoft propping up the leading PC maker:

A vibrant Dell is an important part of Microsoft’s plans to make Windows more relevant for the tablet era, when more and more devices come with touch screens.

This would give Microsoft some amount of control over the restructured Dell, a seat on the Board of Directors, perhaps, with ways to better align the PC maker’s hardware with Redmond’s software. Microsoft wants Dell’s reinvigorated participation in the “Windows Reimagined” business.

But note the phrasing above: “Dell is an important part of Microsoft’s plans…” Better vertical integration without having to pay the full price for ownership, the putative “several billion dollars” would give Microsoft a significant ownership, 10% or 15%. This is completely at odds with the buyout’s supposed intent: Getting out of the PC clone race to the bottom.

Or maybe there’s another story behind Microsoft’s beneficence: The investor syndicate struggles and can’t quite reach the $22B finish line. Microsoft generously — and very publicly — offers to contribute the few missing billions. Investors see Microsoft trying to reattach the PC millstone to their necks — and run away.

Hats off to Steve Ballmer: Microsoft looks generous – without having to spend a dime – and forces Dell keep making PCs.

– JLG@mondaynote.com

No related columns.

Google and the French press have been negotiating for almost three months now. If there is no agreement within ten days, the government is determined to intervene and pass a law instead. This would mean serious damage for both parties. 

An update about the new corporate tax system. Read this story in Forbes by the author of the report quoted below 

Since last November, about twice a week and for several hours, representatives from Google and the French press have been meeting behind closed doors. To ease up tensions, an experienced mediator has been appointed by the government. But mistrust and incomprehension still plague the discussions, and the clock is ticking.

In the currently stalled process, the whole negotiation revolves around cash changing hands. Early on, representatives of media companies where asking Google to pay €70m ($93m) per year for five years. This would be “compensation” for “abusively” indexing and linking their contents and for collecting 20 words snippets (see a previous Monday Note: The press, Google, its algorithm, their scale.) For perspective, this €70m amount is roughly the equivalent to the 2012 digital revenue of newspapers and newsmagazines that constitutes the IPG association (General and Political Information).

When the discussion came to structuring and labeling such cash transfer, IPG representatives dismissively left the question to Google: “Dress it up!”, they said. Unsurprisingly, Google wasn’t ecstatic with this rather blunt approach. Still, the search engine feels this might be the right time to hammer a deal with the press, instead of perpetuating a latent hostility that could later explode and cost much more. At least, this is how Google’s European team seems to feel. (In its hyper-centralized power structure, management in Mountain View seems slow to warm up to the idea.)

In Europe, bashing Google is more popular than ever. Not only just Google, but all the US-based internet giants, widely accused of killing old businesses (such as Virgin Megastore — a retail chain that also made every possible mistake). But the actual core issue is tax avoidance. Most of these companies hired the best tax lawyers money can buy and devised complex schemes to avoid paying corporate taxes in EU countries, especially UK, Germany, France, Spain, Italy…  The French Digital Advisory Board — set up by Nicolas Sarkozy and generally business-friendly — estimated last year that Google, Amazon, Apple’s iTunes and Facebook had a combined revenue of €2.5bn – €3bn but each paid only on average €4m in corporate taxes instead of €500m (a rough 20% to 25% tax rate estimate). At a time of fiscal austerity, most governments see this (entirely legal) tax avoidance as politically unacceptable. In such context, Google is the target of choice. In the UK for instance, Google made £2.5bn (€3bn or $4bn) in 2011, but paid only £6m (€7.1m or $9.5m) in corporate taxes. To add insult to injury, in an interview with The Independent, Google’s chairman Eric Schmidt defended his company’s tax strategy in the worst possible manner:

“I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate. It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”

Ok. Got it. Very helpful.

Coming back to the current negotiation about the value of the click, the question was quickly handed over to Google’s spreadsheet jockeys who came up with the required “dressing up”. If the media accepted the use of the full range of Google products, additional value would be created for the company. Then, a certain amount could be derived from said value. That’s the basis for a deal reached last year with the Belgium press (the agreement is shrouded in a stringent confidentiality clause.)

Unfortunately, the French press began to eliminate most of the eggs in the basket, one after the other, leaving almost nothing to “vectorize” the transfer of cash. Almost three months into the discussion, we are stuck with antagonistic positions. The IPG representatives are basically saying: We don’t want to subordinate ourselves further to Google by adopting opaque tools that we can find elsewhere. Google retorts: We don’t want to be considered as another deep-pocketed “fund” that the French press will tap forever into without any return for our businesses; plus, we strongly dispute any notion of “damages” to be paid for linking to media sites. Hence the gap between the amount of cash asked by one side and what is (reluctantly) acceptable on the other.

However, I think both parties vastly underestimate what they’ll lose if they don’t settle quickly.

The government tax howitzer is loaded with two shells. The first one is a bill (drafted by no one else than IPG’s counsel, see PDF here), which introduces the disingenuous notion of “ancillary copyright”. Applied to the snippets Google harvests by the thousands every day, it creates some kind of legal ground to tax it the hard way. This montage is adapted from the music industry in which the ancillary copyright levy ranges from 4% to 7% of the revenue generated by a sector or a company. A rate of 7% for the revenue officially declared by Google in France (€138m) would translate into less than €10m, which is pocket change for a company that in fact generates about €1.5 billion from its French operations.

That’s where the second shell could land. Last Friday, the Ministry of Finances released a report on the tax policy applied to the digital economy  titled “Mission d’expertise sur la fiscalité de l’économie numérique” (PDF here). It’s a 200 pages opus, supported by no less than 600 footnotes. Its authors, Pierre Collin and Nicolas Colin are members of the French public elite (one from the highest jurisdiction, le Conseil d’Etat, the other from the equivalent of the General Accounting Office — Nicolas Colin being  also a former tech entrepreneur and a writer). The Collin & Colin Report, as it’s now dubbed, is based on a set of doctrines that also come to the surface in the United States (as demonstrated by the multiple references in the report).

To sum up:
– The core of the digital economy is now the huge amount of data created by users. The report categorizes different types of data: “Collected Data”, are  gathered through cookies, wether the user allows it or not. Such datasets include consumer behaviors, affiliations, personal information, recommendations, search patterns, purchase history, etc.  “Submitted Data” are entered knowingly through search boxes, forms, timelines or feeds in the case of Facebook or Twitter. And finally, “Inferred Data” are byproducts of various processing, analytics, etc.
– These troves of monetized data are created by the free “work” of users.
– The location of such data collection is independent from the place where the underlying computer code is executed: I create a tangible value for Amazon or Google with my clicks performed in Paris, while the clicks are processed in a  server farm located in Netherlands or in the United Sates — and most of the profits land in a tax shelter.
– The location of the value insofar created by the “free work” of users is currently dissociated from the location of the tax collection. In fact, it escapes any taxation.

Again, I’m quickly summing up a lengthy analysis, but the conclusion of the Collin & Colin report is obvious: Sooner or later, the value created and the various taxes associated to it will have to be reconciled. For Google, the consequences would be severe: Instead of €138m of official revenue admitted in France, the tax base would grow to €1.5bn revenue and about €500m profit; that could translate €150m in corporate tax alone instead of the mere €5.5m currently paid by Google. (And I’m not counting the 20% VAT that would also apply.)

Of course, this intellectual construction will be extremely difficult to translate into enforceable legislation. But the French authorities intend to rally other countries and furiously lobby the EU Commission to comer around to their view. It might takes years, but it could dramatically impact Google’s economics in many countries.

More immediately, for Google, a parliamentary debate over the Ancillary Copyright will open a Pandora’s box. From the Right to the Left, encouraged by François Hollande‘s administration, lawmakers will outbid each other in trashing the search engine and beyond that, every large internet company.

As for members the press, “They will lose too”, a senior official tells me. First, because of the complications in setting up the machinery the Ancillary Copyright Act would require, they will have to wait about two years before getting any dividends. Two, the governments — the present one as well as the past Sarkozy administration  — have always been displeased with what they see as the the French press “addiction to subsidies”; they intend to drastically reduce the €1.5bn in public aid. If the press gets is way through a law,  according to several administration officials, the Ministry of Finances will feel relieved of its obligations towards media companies that don’t innovate much despite large influxes of public money. Conversely, if the parties are able to strike a decent business deal on their own, the French Press will quickly get some “compensation” from of Google and might still keep most of its taxpayer subsidies.

As for the search giant, it will indeed have to stand a small stab but, for a while, will be spared the chronic pain of a long and costly legislative fight — and the contagion that goes with it: The French bill would be dissected by neighboring governments who will be only too glad to adapt and improve it.

— frederic.filloux@mondaynote.com   

Next week: When dealing with Google, better use a long spoon; Why European media should rethink their approach to the search giant.

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For years, Apple’s been told its products were too expensive – and prospered mightily. Today, many suggest Apple should launch a low-cost iPhone. Will history repeat itself, or have the rules of the Smartphone Wars changed in ways that will force Apple to alter its strategy? 

Dismissing the prospect of a Low Cost iPhone isn’t all that difficult. Just look at Apple’s history. For years, the high tech pundits have hectored Apple for it’s inability to see the wisdom of the cheap. In the late eighties and into the nineties, they insisted that a low cost Mac was the only way the company could survive against the swarm of PC clones. Steve Jobs returned and righted the Apple ship, no LC Mac required.

A decade later, the netbook was cast as the killer torpedo that would sink the resurgent Mac business. Jobs famously dismissed the netbook as a cheap plastic device Apple would never stoop to make: “We don’t know how to build a sub-$500 computer that is not a piece of junk.”

At the September 2012 iPhone 5 launch, Tim Cook announced that the MacBook is the #1 selling notebook in the US (5:30 into this video). Couple that with the success of the iPad, and the netbook is dead. And thus, by analogy, there will be no iPhone LC. Apple doesn’t do cheap. The company will focus on a premium customer experience and enjoy a high profit margin. The race to the bottom will be left to Android clones. Move along, nothing to see.

Not so fast.

Using Apple’s history — and particularly the sorry netbook story — to dismiss the iPhone LC makes questionable assumptions. As Marx (Karl, not Groucho) liked to say: ‘History doesn’t repeat itself, it stutters’. Smartphones aren’t PCs, only smaller; the rules of the Macintosh game don’t apply to the iPhone. The Smartphone Wars are waged by markedly different laws, and are waged well by Google and Samsung, unencumbered by a PC past.

But let’s back up: What would a Low Cost iPhone look like, whom would it serve, and just how “low” is Low? The easiest way to picture the thing is to drag out your old iPhone 3G or 3GS. A plastic body, an “original-resolution” screen (no Retina here), a slow processor and even slower wireless connection. It’s not today’s iPhone 5, with its metal body, lovingly machined chamfers, Gorilla Glass, high-speed A6 processor, and 5 megapixel camera.

The phone would serve the prepaid market, it addresses customers with little or no credit. Everything is paid for with cash up front: You pay the full, unsubsidized price for the phone and you buy “minutes” (let’s call them units of wireless network utilization) in advance. Buying units for these devices is a simpler experience than I imagined: Go to the neighborhood drugstore, pick out a phone card by a (virtual) carrier such as TracFone, and the cash register prints an activation code you then enter into the phone. Simple, pervasive, and very successful — even in a “rich” country such as the US.

So far, Apple has avoided the prepaid approach. When we give $199 to Verizon for a $650 iPhone, the $450 subsidy is an act of faith by the wireless carrier. The philanthropic organization assumes we’ll pay our bill every month for two years, by which time the carrier has recouped the subsidy. This is the postpaid world that Apple understands.

As for the pricetag, let’s assume that an iPhone LC would cost about $100 to manufacture — that’s half the cost of the basic iPhone 5. If we apply a 60% margin percentage — the same as today’s iPhone 5 — the unsubsidized iPhone LC would sell for $299.

That’s too high. Let’s try lower numbers: 50% margin gets us down to $199; 30% to $149. To get to the magic $99 unsubsidized retail, with an un-Apple 30% margin, the iPhone LC would need to be manufactured for less than $75, about one third of today’s iPhone 5.

And even $99 may not be low enough. Go to Amazon and look for prepaid cell phones. The first models start at $6.99 (not recommended, I tried one at $8.99 for my visiting Mother-in-Law, that was a mistake). Real smartphones running Android 2.2 start at $49.99 – today! For another $10 you get 2.3. The $80.73 Kyocera Rise runs the much more modern 4.0 (Ice Cream Sandwich) version. (I checked prepaid prices in other countries and the situation is similar.)

In his earnings release conference calls, Tim Cook constantly refers to Apple’s interest in the vast prepaid market segment but so far it’s been all talk. The reason for the gap between words and deeds sits in plain view on Amazon’s prepaid cell phone page. As more devices enter the market, we can only imagine what the page will look like a year from now.

The prepaid market, without carrier subsidies, is already in a PC-like race to the bottom. For Apple to enter and prosper in this segment, it has to determine two things: What sort of premium can it get for a low cost iPhone, and what would the device mean for the rest of the product line?

Apple execs are fond of saying they’d cannibalize their products themselves rather than let competitors do it. Even if exquisitely executed and priced just so, it’s hard not to see the (putative) iPhone LC as the augur of a new era of lower Apple margins. In other words, the iPhone LC wouldn’t be born of a tactical decision to add a new set of customers, it would be a strategic move that signals a new phase in the Smartphone Wars.

Apple loves to control the game. So do Google, Microsoft, Samsung, and everyone else, of course, but Apple’s love is an unusually intense, deeply seated drive that stems from Steve Jobs’ own (carnal as opposed to deliberate) need to master and direct every aspect of the game.

In the PC business, Jobs pushed vertical integration down beyond hardware and software, and into its retail chain of Apple Stores, thus ensuring a tightly controlled delivery of the product experience. The same applied to the iPod and its integration with iTunes. The well-controlled media delivery and novel micro-payment system was a huge win: In 2006 iPod revenue outpaced the Macintosh line.

The iPhone started with Apple fully in control. AT&T stood aside and let Apple run the table, handle all aspects of the customer experience (except for call quality). Later, the App Store extended Apple’s control of the game. The iPhone became an app phone and a phenomenal success.

(We also have the counterexample of Apple TV, an exception that proves the rule. TV content owners, distributors, and carriers haven’t let the Cupertino company seize control of the customer experience, and thus Apple TV remains a “hobby”.)

Apple is still in control of its iPhone ecosystem… but things have changed. Now the company faces Google and Samsung. Google isn’t just Android, it’s also a provider of a wide set of services such a Google Maps, Gmail, Google Docs and Drive, Google Voice, and on and on. Samsung is more vertically integrated, makes its own smartphones components, and spends more marketing money ($13B last year) than anyone else.

In today’s smartphone scene, can Apple still enjoy the control — and the ensuing profit potential — it craves? And if not, how will it react? Tactics or strategy?

– JLG@mondaynote.com

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