Killing Them Softly

It may not be long until new innitiatives such as Amazon’s Kindle Direct Publishing Program, Amazon’s Studios and Google’s Music Artist Hub shorten the authors-publishers-retailers chain, quietly displacing traditional Media intermediaries.

Amazon announced at the begining of November 2010 that John Locke had become the first author without a major publisher to sell more than 1m books over the Kindle. The company also acquired rights to 35 titles by Ed McBain, a crime writer.

Shortly after, Amazon has recently anounced the acquisition of 450 children’s titles from Marshall Cavendish, a subsidiary company of Times Publishing Group, the printing and publishing subsidiary of Singapore-based conglomerate Fraser and Neave, and at present a publisher of books, directories and books. In this way, Jeff Bezo’s company now adds children books to its publishing program, which currently includes science fiction books, thrillers, romance novels, new authors books, foreign translations and short stories.

Add to this that Amazon recently claimed that they have been selling more than 1mn Kindles devices in a week, and this is a very impressive sell channel for book authors to circumvent the power of their traditional editorials and publishers.

Will this stop here? Amazon is a all-content Internet retailer. The company couldn’t leave out the Movies business, and it has decided to go into the movie business by creating Amazon Studios. This allows for Amazon to develop films, and for e.g. Warner Bros. to produce those. How Amazon develops films, it is basically by launching a screenwriting and filmmaking contest among individuals willing to cede owner rights to the Internet company. And any filmmaker who likes a script posted in amazon.com can use it to make what they call a “Test Film”, and publish it through the company portal as a screenplay.

So far for the Book and the Movie industries. And yes, Google has recently launched its Music Artist Hub, an initiative that allowed Google to team up with a selection of major artists to offer previously unreleased concert albums and remixes, supporting unsigned and independent musicians. As Andy Rubin, SVP of Mobile at Google, puts it:

“With the Google Music artist hub, any artist who has all the necessary rights can distribute his or her own music on our platform, and use the artist hub interface to build an artist page, upload original tracks, set prices and sell content directly to fans — essentially becoming the manager of their own far-reaching music store. This goes for new artists as well as established independent artists.”

Whether all these projects will pay off, it remains to be seen. But the trend is there, the traditional publishing, editorial and discographic industries are being replaced by another type of intermediary, but one that is ready to adjust their selling prices to the market demand.

Yes, it’s true, some authors are even trying to circumvent Amazon itself as a publisher, selling directly to consumers. J.K. Rowling for instance recently announced her Pottermore project. Also, the UK-based literary agent Andrew Wylie last year briefly alarmed publishers by establishing an imprint to sell electronic versions of books by clients including John Updike. And big-name music bands such as Radiohead have been able to sell directly to consumers, making the later ones chose the price that they were willing to pay.

The success of those individual projects has apparently been megre so far. These projects hugely depend on the authors’ mass market reaches, and seem therefore not to be made for niche writers. But that dependency on the existing mass market reach doesn’t apply to Amazon, because it already has it, doing the job for those niche authors.

Indeed, as in the case of Amazon KDP, Amazon Studios seems to be more oriented towards niche authors / screenwriters. The business model that Amazon Studios allows — ceding content rights for 18 months — makes more known creators to chose publishing through Amazon when they have already tested first their success through the more traditional approach. But that does not seem the point. Entering a market by addressing a low profit or even unprofitable niche market, and disrupting the industriies’ incumbent later, is something that has proved to be quite successful in the past. Amazon and Google have been able to launch their respective programs because the later are subsidized by the companies´main businesses. Indeed, Google Music Hub is oriented towards a very small niche market, miles away from the company main business in advertising. And the amazon.com revenue is roughly twice as much as the most successful movie studio, and even then, a good portion of those revenues that the studio generates goes to the movie studios like Warner that produced those films.

Key to the still-to-be-seen, but promising, success of authors away from the traditional publishing industries is the use that Amazon and Google could make out of their social capabilities. Amazon is trying to make reading a more social activity, through their recently launched Kindle Owners’ Lending Library, a program that allows for Amazon Prime members to share ebooks on the Kindle.. W.r.t. its publishing initiative, Jeff Bezo’s company is making its publishing project a collaborative one, where filmmakers and screenwriters can work together developing projects to their full potential. And more evidently than in the case of Amazon, Google is making the channels it owns like Youtube and Google+ part of the Artist Ub initiative, by allowing authors to publicize their music.

At the end, these projects seem currently limited in their business models and rewards, but it is interesting because it may not be long until Amazon and Google can loose their need of the traditional book publishers, movie studios and music agents, displacing the traditional industries.

Regards,

Carlos.

There is more to Innovation than Patents

Thomson Reuters has issued their Top 100 Global Innovators list. And, when we compare the conclusions with those of BusinessWeek last year, it’s clear that there is more to Innovation than patents.

This study by Thomson Reuters came up with the most innovative companies and countries, as recognised by the patent offices across the world, and by the peers of those companies. The aim was to measure the usefulness and applicability of the companies’ patents in a globalised world.

I found that report very interesting, certainly nowadays, because of the increased importance of the patent portfolios of the companies, as we have witnessed different episodes of the so-called ‘patent wars’ between Internet companies and device makers.

The analysis by Thomson Reuters measures companies by the proportion of their patent applications that are granted (“Success”); the number of “quadrilateral” patents (those granted in China, Europe, Japan and America), which measures the “Global” aspect of innovation (measured using the Thomson Reuters Quadrilateral Patent Index); how often patents are cited by other companies (“Influence”, measured by the Thomson Reuters
Derwent Patents Citation Index); and whether patents relate to new techniques or inventions (“basic” patents) or are refinements (“equivalents”) of existing ones (“Volume”). All very objective, isn’t it?

In terms of geographies, Thomson Reuters cites the following:

The largest percentage is from North America: 40%. Asia accounts for 31% of the most innovative companies in the world and Europe for 29%. ^…*

In Asia, Japan dominates with 27% of the representation. As a testament to Japan’s solid innovation foundation, it has representative companies in 12 of the 16 industries. The only other Asian nation present is South Korea, with 4% of the companies. The lack of companies from China is noteworthy and underscores the fact that although China is leading the world in patent volume, quantity does not equate to influence and quality.

And the first thing that stroke me when I first read this report by Thomson Reuters was the difference in conclusions with a similar report that BusinessWeek and The Boston Consulting Group issued last year.

The difference between the two reports is outlined by the fact that BusinessWeek stated that “the age of Asian innovation has begun”, seemingly contradicting the conclusions by Thomson Reuters.

The difference seems to lay in the methodologies that were used in each of these two studies. Indeed, the study by BusinessWeek / BCG was based on a mix of opinions by executives and of a series of financial measurements:

A 21-question poll to senior executives around the globe. The 1,590 respondents, who answered anonymously, were asked to name the most innovative companies from outside their own industry in 2009. BCG then factored in the financial performance of the vote-genders. The final list weights the survey results 50%, stock returns 10%, and three-year revenue and margin growth 5% each.

All in all, I do have a preference towards the analysis by Thomson Reuters, mainly because it seems much more objective and less biased by opinions.

Now, an interesting thing to note is that the analysis by BusinessWeek / BCG grants a lot of importance to the financial results of the companies, and they use profitability as a measure for Innovation; whereas Thomson Reuters does not take this into account to rate the level of company innovation.

Why is this interesting? Well, it seems that there is quite a gap between Innovation objectively measured and the perception by the industries (understood as the set of executives that were polled by BusinessWeek / BCG). This gap is exemplified first by the difference in the importance that Thomson Reuters and BusinessWeek grant to Asia as a increasingly breeding ground for Innovation. Another example of such a gap is given by the fact that Thomson Reuters does not include Google as one of the top 100 innovative companies, whereas BusinessWeek cites Google as the second most innovative company, right after Apple; who wouldn’t be tempted to list Google as a top innovator?

There deffinitely seems to exist a difference between perception and reality, doesn’t it? Or is it that there are other forms of Innovation — such as Organisational Innovation — that are part of the perception by the main industries, and that cannot be measured by any patent index? In the case of Google, probably the second question holds true.

Anyway, here is a diagram that shows the importance of the different industries in Innovation, and of geographies in innovating in two important sectors for me: Telecommunication Equipment and Semiconductor & Electronics:

Figure 1: 100 Most Innovative Companies in the World, 2011, by Country

Regards,

Carlos.

Google Music, and the Desintermediation of the Music Industry

Just yesterday, I wrote here about my impressions about the new RIM BBM Music service, a social feature by nature. And, as I was writing it, Google unveilled its Music service too. Little by little, we are having more details of Google’s anouncement, which can affect the music industry.

In that same note, I pointed at Google Music, at Apple’s iCloud / Match + Ping, and at Spotify + Facebook as the most likely competitors of BBM Music. At this point, I would consider the former companies more as threats than competitors. A success of e.g. Google’s Music would certainly hinder RIM’s BBM Music. But I still see the two products as having different jobs-to-be-done.

Indeed, if I look at it from the other side (i.e. who is the competitor of Google Music), I would point at Apple. Because the people that are already using Google+ would not find BBM Music a compelling factor to move out from that social network and to switch from Android devices to Blackberry’s.

But I have an issue in seeing Apple as a real competitor to Google for the music store (locker) and recommendation feature. Agreed, Google do not provide a match service like iTunes Match, but that should be an easy thing to fix. And, as I reported in my previous post, Ping has been seen since as a failure, because of the lack of integration with a social network, and because of the lack of some important features inherent to a social network (and that iTunes could not perform by itself).

My first impression about Google’s Music is that its main threat is itself. Pricing, number and type of agreements with the music industry, great user experience through a very seamless integration with Google+ and with Android devices, availability of features, … will all of them be the key to the success of Google Music, and these are only up to Google themselves.

I will not ellaborate on the user experience and integration with Google+ and with Android phones, because I have not tried the product. But, as a first shot, the level of integration and user experience should be much better than Apple’s. If it only were because Apple has been unable to integrate with a social network, whereas Google owns Google+.

What really seems important to me in the success of Google Music is the relationship with the music industry. And in that line, it’s true, Google has apparently not reached an agreement — yet — with Warner Music Group. But again the lawers should be able to fix this, complementing the already reached agreements with Universal Music, Sony Music, EMI and the major independent labels.

What seemed more interesting to me is that Google seems to be trying to make another step towards the desintermediation of the music industry, teaming up with a selection of major artists to offer previously unreleased concert albums and remixes, and supporting unsigned and independent musicians. This step takes the form of an Artist Hub, which is built into Google Music.  As Andy Rubin, SVP of Mobile at Google, puts it:

“With the Google Music artist hub, any artist who has all the necessary rights can distribute his or her own music on our platform, and use the artist hub interface to build an artist page, upload original tracks, set prices and sell content directly to fans — essentially becoming the manager of their own far-reaching music store. This goes for new artists as well as established independent artists.”

With the recent opening of Google+ to corporations, that hub should certainly be a boon to all those artists who are convinced of the irremediable transformation that the music industry has to go through, and that they have to take advantage of it instead of fighting it.

That initiative is important indeed. Artists who sign up for the hub will be given 70 per cent of all sales.

Whereas, in the case of digital stores such as iTunes or now Google Music locker, where intermediates exists, artists apparently make between 12 and 50 percent of what the label receives from digital downloads, which itself is estimated to be 70 percent of the purchase price.

As the case of a previous lawsuit of F.B.T. Productions against Universal explained:

“What appears to be at issue is whether Universal is simply “distributing” the music to iTunes in the same way that it distributes the CDs it presses to stores like Wal-Mart. Such distributions tend to have a low royalty rate for artists. But when major labels “license” the music to some other entity, they split the extra revenue 50/50 with most artists. So the question really turns to just how much like a regular music store digital retailers are.”

iTunes and other digital stores get one copy of the music tracks, and replicate (and distribute) millions of their own copies. This makes digital stores like iTunes more like a “licensee” that does its own distributing, and the higher 50/50 revenue split of the 70 percent of the purchase price should apply, instead of the 12/88 split.

So, when it comes to digital downloads, under a “distribution” agreement artists receive 12 percent of 70 percent of sales, that is 8.4 percent. Whereas, under a “licensing” agreement, artists receive 50 percent of 70 percent of sales, that is 35 percent.

Digital stores, like iTunes or Google Music store, should run under a “licensing” agreement, and this would allow artists to perceive a 35 percent of the total music sales, at best. Compare this with the 70 percent of Google Music’s artist hub.

There are various skeptic voices about the possible future success of Google Music. The reasons for that skepticism include the comparison with the selling of digital books (Google has not been able to displace Amazon, and there are serious doubts that they will be able to scrap some of iTunes’ business), or the failure of similar social music initiatives like Apple’s Ping (diminishing the value of the social aspect of Google Music with Google+).

I doubt that the intention of Google will be that of making substantial money by selling music. As music-related sales ‘only’ meant 6% to Apple in Q4, FY11.

But Google Music should be able to get traction among the independent music artists. And this can signify not just a back up to Google’s social initiative, but perhaps another stepping stone towards the desintermediation in the music industry.

Regards,

Carlos.

RIM’s BBM Music, a new Kid in Town

Research in Motion (RIM) has recently announced the availability soon in the UK of a new Music offering based on their existing BBM service, BBM Music. Among a list of alternative choices with Amazon, Google, Apple and Spotify, who do they compete with? What is the job that BBM Music would be hired for? And by the way, why the UK first?

Not long Amazon launched in March 2011 their Amazon Cloud Music service, whose offering consisted in storing in the cloud (Amazon’s cloud) the music of their end customers, so the later could stream that music to a series of different devices (PCs and MACs through web browsers, and Android devices) that they own.

It’s interesting to note that Amazon launched their music service without having the proper licenses from the distribution companies, and arguing that they needed none of them. This led at the begining of November to the withdrawal of apps that enabled that music service by Amazon on iOS devices, after the music distribution industry expressed their strong concern back in March that the digital retail company did not acquire the proper licenses for streaming; something very similar to what hapenned to MP3.com back in the 1990′s, although with substantial differences in scale of the companies involved (the controversy led MP3.com to an end, while I doubt this will be the case for Amazon).

Then there is Google, who launched Google Music Beta back in May this year, and who has just unveilled today their official Music service. And now with the full support of the Music Industry in the US. Note that Google Music Beta seemed at that time to be following the same path as Amazon’s Cloud Music, who openly stated the case against needing any sort of agreement with that same Music Industry; this was precisely the reason why Apple prevented new versions of apps that facilitated the access to Google Music Beta on iOS devices. Today’s announcement of Google Music corrects this initial perception.

Intermingled with all those anouncements, Apple launched their iCloud with iTunes Match service in the US, a service that includes the capability of matching the end user’s music in his/her iTunes Library with Apple’s library, and download it later to any other of the same user’s iDevices.

And then we have now RIM’s BBM Music, which will allow its subscribers to choose their 50 favorite tracks for streaming online (which they can also listen later while offline). After downloading the BBM Music app, users will then be able to share their selected music with their friends, who can then stream it for free, and will then be able to listen back to the tracks that their friends are adding to their own playlist. And that is what seems to be the value add of BBM Music: to combine the listening to music with social networking, allowing for RIM’s users to stick to their existing BBM messaging and devices, turning that messaging into a RIM-specific social network on its own, something that is interesting just by itself.

And this is what is being sold as a differentiator by RIM. But is it really such a differentiator?

First of all, I purposedly forgot to mention that Google Music also allows the sharing of music with friends through Google+. Now, it turns out that, in theory at least, Apple also has a equivalent feature, with iTunes Ping, a music social network launched in September 2010.

Apple’s iTunes Ping turned out to be a failure because of a number of issues, including the lack of integration with Facebook and Twitter (forcing to use Ping just in iTunes, which certainly is not a social network on its own), something that has made some analysts to label Ping as an antisocial feature.

And it precisely is the failure of iTunes Ping that is also making some other analysts to state that they are unimpressed by the social side of Google’s Music store and service; an impression that could easily be extended to RIM’s BBM Music, couldn’t it?

At this point, I would ask myself what job is it that RIM is trying to do with its new social music product.

Undoubtedly going social is a key component of RIM’s new music service. And this would leave Amazon out of the equation currently at hand. Not just because there do not seem to be any social capabilities of Amazon’s Cloud Music, but also because the dependability of Amazon on the selling of music is not shared by Google, Apple or RIM. Google do not sell music, they sell advertising (advertising made up 96% of their revenues in 2010); Apple and RIM do not sell music (‘only’ 6% of Apple’s Q4, FY11 sales where attributable to “sales from the iTunes Store, App Store, and iBookstore in addition to sales of iPod services and Apple-branded and third-party iPod accessories”), they sell hardware and security services; Amazon though does sell music, among other contents.

So this leaves RIM’s BBM Music competing with Google Music and Apple’s iTunes iCloud / Match + Ping.

I have no idea what did RIM’s strategists had in mind when they first thought of BBM Music, but BBM Music certainly seems to have an advantage over Google’s and Apple’s equivalents, an advantage over a specific type of job. And a hint about that can be found in that a recent Ofcom survey suggests the BlackBerry is preferred by teenagers in the UK over other smartphones, by large, with 37% of teens carrying a BlackBerry (it does not seem now to be a surprise that the launch of BBM Music hapens in the UK…). Exploiting the teens’ market certainly seems to be a job fit for RIM’s BBM Music, and one where the Canadian company can leverage their current presence and preference among the target consumers, an advantage that Google or Apple do not currently have.

Again purposedly, I have left another possible competitor for RIM’s BBM Music: Spotify, who partner with Facebook and Twitter.

Spotify is really successful in Europe, a market where the US-based companies Google and Apple have to still work on the licensing side of contents. That makes Spotify the incumbent social music service for RIM to beat. Only that Spotify Unlimited costs GBP 4.99, and RIM BBM Music costs USD 4.99. Is this number a coincidence? Agreed, one goes for pounds, the other one goes for dollars, which brings the comparison to a 7.89 vs. 4.99 in dollar terms, but at this stage it’s all about marketing, isn’t it?

And true, the limit RIM’s BBM Music to a list of 50 tracks does not match an unlimited offering. But do teens need a huge list of songs, or just enough of them to create a sense of social gathering? If I were a teen, and if I were one of those 37% of UK population already having a Blackberry, I would certainly go with BBM Music, it certainly would fit the job I would have in mind, and at a much lower price. And isn’t this a type of disruptive innovation? Spotify, beware, a new challenger has just come to town (only, it just runs on Blackberries, will that matter?)

Regards,

Carlos..

The Increase of Android Smartphones in the US

According to comScore, “Google Android continued to gain ground in the smartphone market reaching 44.8 percent market share”. Does this mean that Android is definitely winning the smartphone war over Apple’s iOS?

The figures by comScore may suggest so, with Google reinforcing its subscribers marketshare in the US in Sept’11 at 44.8% (up 4.6 p.p. since Jun’11), while Apple remains 2nd with 27.4% (up ‘only’ 0.8 p.p.), in a market “whose penetration reached 37.4% (an increase of 2.9 million or 1.24 points of percentage)”, where “approximately 650k consumers switched from non-smart to smartphones every week during September”, and where the “50% penetration is expected to be reached by end of September 2012″ (cf. Asymco’s post about comScore’s report release).

This seems unquestionable data, even if you take into account that, although the iPhone 4S is being sold very well, many Apple professed users are reported to be waiting for the iPhone 5.

But if you scratch the surface beyond the number of subscribers, and you go down to the money, the picture seems a bit different.

First of all, if you compare apples with apples (or, I would say, pears with pears, so I may be less easily accused of having a prejudice in pro of the Cuppertino-based firm), and you exclusively focus on the selling of the handsets’ hardware, the highly diversified market of Android OEM’s is making these manufacturers to almost not making money off selling Android devices, when selling smartphones. True, the Chinese market is very different from the US, but it nevertheless questions a bit the worldwide success of Android versus Apple’s iOS.

On the other hand, Android handsets have been reported to be much more prone to failures. WDS reports that the failures of the Android-based handsets are costing operators $2bn per year in “returns, restocking, restocking and transportation”, with those same types of handsets failing 4 times more more than Blackberry’s. True, those failures seem to be due not so much to the Android software, but to how the manufacturers are making use of the OS platform and to how they are allowing for the user experience, something increasingly difficult to control because of Android’s market fragmentation. But this certainly has the potential of upsetting the telcos; in that same report, telcos are advised to “to use the bargaining power that arises from hardware faults to negotiate better deals from handset manufacturers”, therefore impacting the revenues of the Android OEM’s.

But in the case of Apple, money figures go beyond the revenues and margins of selling smartphones, maybe not for Apple itself, but for a myriad of other companies that exist around Apple.
Indeed, Apple has created an ecosystem that allows revenue generation through the purchase of content (e.g. subscriptions, music, apps., …), an ecosystem that is supposed to increase the number of cross-selling opportunities for other Apple gear by some 12%; e.g. there are 12% more chances that an iPhone user buys an iPad than an Android-based tablet.

And Apple is taking care of this ecosystem, e.g. with the available apps.

Yes, it’s true, Android available apps outnumber Apple’s. But, giving the difference in subscribers, this is making Android’s app downloads per user to still lag behind Apple’s by 2 to 1, making the app developers happier in maintaining their business relationship with Apple’s appstore rather than with Android’s marketplace, as it can be seen by the increase in the average selling price of Apple’s apps.

All in all, the figures reported by comScore seem to be very good news for Google, but at the end it’s not all that hunky-dory. Certainly outside the US, where Google certainly has to fix the chaos that its OEM’d OS has generated. And there are also threats as we have seen for Google worldwide, including the US.

Regards,

Carlos.

The Amazon Kindle Fire, a Potential Disruptive Product

Several posts appeared during the last weeks about the Kindle Fire, and about the potentially disruptive role that this new device by Amazon would play. One of these posts by Asymco attired my attention because it challenges this potentially disruptive role, and I decided to elaborate on it, to argue about the value of the Kindle Fire outside the US.

All those posts label the new Kindle Fire as a disruptive innovation. But they differ in the device being a low-end disruption or a new-market disruption.

A disrupted innovation – a concept developed by Harvard’s Prof. Clayton Christensen – is one that either addresses some customers’ needs that were not met before – this is what is called a low-end disruption –, or creates a new market – the new-market disruption –, in opposition to the sustained innovation concept.

A low-end disruption targets customers who do not need the full performance valued by customers at the high-end market. This is not just about low prices, it’s about a portion of the market – called the low-end market – that is surpassed by a certain number of features and capabilities of the product that is sold, features and capabilities that justify the product margins, but that are not really appreciated by the so called low-end customers.

A new-market disruption targets customers who have needs that were previously unserved by the existing incumbents.

Asymco’s point is that the new Kindle Fire is a new-market disruptive product, but that it’s not a low-end disruptive one.

The post starts by estimating that Amazon is losing approximately $50 per unit sold and this makes the new Amazon Kindle Fire a low end product. But more than that, Amazon does not have room to make anything else out of it. Indeed, on one hand the form factor of the Fire is very similar to RIM’s Playbook (they share the same ODM), but RIM has been dramatically decreasing the price, and this would give little room to increase the price of the Fire, should Amazon want to. On the other hand, even if Amazon would want to make the Fire a high margin product, the post notes that Apple is already selling its iPad at moderate margins (some 30%), and it would be difficult for Amazon to go beyond that.

So Amazon has launched its Fire as a low-end product, and with no intention to make anything else out of it as a product. Its value lays on its capability to create a product / service asymmetry to channel Amazon’s main business, content delivery.

For Asymco, the problem is that, for the Fire to continue being for the long term a subsidized platform for the selling of Amazon’s primary business, Amazon would need constant investments in short product life cycles for its tablet, and this would be the second requisite for the Fire to be a low-end disruption. And there apparently are enough signs that Amazon is not dedicating enough investments to its Fire, while they are heavily spending in their major business. According to Asymco, that would not be a problem, if tablets would be commoditized products with no room for improvement, so that other tablet sellers could not differentiate themselves from Amazon’s; but this is not the case, there still is a lot of room for improvement, and the Fire will need to constantly innovate or play fast catch up.

Asymco provides examples that illustrate that constant innovation is indeed necessary for a product to create or even maintain a disruption. E.g. in the case of the games consoles and the set-top boxes industries, companies have not been able to create a market disruption because they could not shorten their products’ life cycles (by trying to make their products cheaper, something that they failed to do), and they needed the subsidies they had (games in the case of the games consoles industry); the companies depended too much on those subsidies, and they were trapped in long product life cycles that prevented innovation, and thus disruption.

All cases mentioned in Asymco’s post relied in a product-service asymmetry to subsidize innovation enough, thus creating and maintaining a market disruption, but they were not able to either maintain the subsidies to innovate in industries that needed that it (the case of the games consoles, or of the set-top-boxes), or to create new subsidies or to dedicate enough of them to innovate in their products (the case of RIM).

On the contrary, Apple has been able to maintain the value of the apps (through the Telecom Service Providers’ ARPU uplift), thus generating enough subsidies for their iPhone, and has been able to recognize the value of high innovation and short product life cycles.

If Asymco’s claims were true in that Amazon may not be dedicating enough resources to innovate in its Kindle Fire, I would agree. Indeed the potential of a low-end disruptive innovation lies in its capability to displace the incumbent in the long run by first addressing the unmet needs of the low-end market and then addressing the high-end customers. And this is why the company commitment to a constant innovation and short product life cycles is important.

But it all depends at the end who you think that the Fire is competing with though, because this will determine who the incumbent is. The fact that the Kindle Fire was born e.g. without 3G access or a camera questions the capability of the Fire to disrupt Apple’s high-end market if Amazon does not dedicate enough resources for innovation; but if Amazon is targeting Barns & Noble’s Nook, there can definitely be a case for Amazon’s Kindle Fire to be a low-end disruptive product. A video camera may not be that important for the market that the Kindle Fire has been made for; Amazon is heavily innovating in Cloud services at home or wherever there are Wi-Fi hotspots, and this is where the Fire can be stronger. But consumers will not have different tablets, one for the usage that the iPad has been made for, and another one for the usage that the Nook has been made for. So the Kindle Fire may have to compete with Apple’s iPad anyway, even if this were not Amazon’s primary intention, and then innovation in the product would be critical; the lack of that innovation would make Amazon’s Kindle Fire to become “blind to the hardware and client OS software innovations coming down the pike”.

So I tend to agree, there are reasonable doubts in that the new Kindle Fire can be a low-end disruption. But, is it a new-market disruption?

Again, it depends on the market that the Kindle Fire is trying to address.

As Asymco mentions, the service that is the origin of the asymmetry and of the subsidy does not scale well. As the post points out, “book rights are limited to national boundaries as are movie rights and song rights. Apple has only this week finally completed the rollout of iTunes music to all of Europe! A process that took almost a decade”.

So unavailability of the contents (e.g. e-books) outside the US may well not make the Amazon Kindle Fire a new-market disruptive innovation outside of that country, there may at the end not be a strong case for a consumer in Europe to buy a Amazon Kindle Fire instead of any other tablet, except for the price; and this is something that can be easily dealt with by Apple. This is a very important point, something that companies in the US usually overlook when trying to disembark in other regions, like Europe or Asia.

In summary, I agree in that the Fire may not have “the opportunity to disrupt the iPad or tablets in general”.

But I also have my doubts that the Fire may really become a new-market disruptive product outside the US.

What the Fire can definitely be is a threat to the launch of video streaming services in Europe, cf. Netflix in Spain and in the UK.

And because of the potential inability of proper content to satisfy the expectations of the European users, what the Fire may become is yet another source of concern for the so-called illicit downloads for the US content owners outside that country.

Regards,

Carlos.

The Cloud Telco Opportunity in the EU

The potential benefits of Cloud computing for the society are thought to be enormous. Even if some cautious analysts have been preventing of a possible related hype, and predicting a plateau of expectations in 2 – 3 years time. But the opportunity certainly is there, and the telecommunications service providers are seeing an opportunity there, so I wondered, how big could be that opportunity for telcos, and particularly for telcos in Europe?

The Centre for Economics and Business Research estimated in December 2010 the potential cumulative microeconomic benefits of the Cloud for corporations in the major EMEA economy (France, Germany, Italy, Spain, the UK) to be over €763 billion in the period from 2010 to 2015.

This is 1.57% of CEBR’s estimates of the total cumulative GDP over the same period for the same region.

In terms of macroeconomic benefits, the professor Federico Etro, of the University of Milan, estimated back in 2009 that “Cloud computing could create between 300,000 and 1.5 million new jobs in five years in Europe alone”.

According to some analysts, that level of opportunity could reduce Europe’s unemployment rate by 0.3% – 0.6% and boost GDP growth by 0.1 – 0.3%.

So there are many reasons to regulate to make sure that governments and corporations capture this benefit, by smoothing and accelerating the path of development and adoption of cloud computing.

On the other hand, as a participant in a Cloud Workshop in California in 2009 pointed out, “Cloud Computing may multiply the benefits of the Internet by a factor of 10… but we may also face 10 times the challenges”.

In that line, and as per Viviane Reding, European Justice Commissioner, said in January 2010, “a cloud without robust data protection is not the sort of cloud we need”.

Indeed there exist multiple recognised risks in the adoption of Cloud technology. And here again there are also reasons to regulate to minimise those risks, e.g.: Privacy concerns and data ownership, Jurisdiction complexity, Data protection, trustworthiness of data, and the lineage of data, Vendor lock-in, Standards compliance, Outdated laws and the limitations to letting users’ data cross country or continental borders, or Users’ lack of understanding of cloud computing.

Neelie Kroes Vice-President of the European Commission responsible for the Digital Agenda  sketched (1), in her speech Towards a European Cloud Computing Strategy at the World Economic Forum in Davos on 27 January 2011, the three broad areas for the cloud strategy in the EU:

• First, the legal framework. This concerns data protection and privacy, including the international dimension. It also concerns laws and other rules that have a bearing on the deployment of cloud computing in public and private organisations. And it concerns users’ rights insofar as they are provided for by law;
• Second, technical and commercial fundamentals. We want to extend our research support and focus on critical issues such as security and availability of cloud services. As a mediator, the Commission can also play a stronger role in the technical standardisation of APIs and data formats, as well as in the development of template contracts and service level agreements;
• Third, the market. We will support pilot projects aiming at cloud deployment. To really harness the power of public procurement we want to engage with our public sector partners on Member State and regional levels to work on common approaches to cloud computing.

On June 16th-17th in Brussels, a session built on and broadened the consultation process on the European Cloud Computing strategy launched by Vice-President Kroes earlier this year.  The objective of this workshop was to “help identify the main elements of a European Cloud Strategy and the possible need for public-policy intervention, considering the demand and supply side concerns”.

Actions and commitments mentioned in the workshop:

• Policy recommendations: to complete the digital single market to overcome fragmentation (need the right legal framework) and to pursue European ‘digital values’ (data protection, e-privacy, etc) globally;
• Future research and innovation initiatives: to focus cloud research on providing and speeding up innovation, and to work on interoperability and standards (show cases and best practices).

Overall policies in the EU address and integrate both the supply side (i.e. ICT or SSBS R&D or industry programs etc) as well as the demand side (i.e. e-skills for user, broadband availability, etc). Regulation in the EU has to be regarded as an effort of making a multi-country assessment of industries whose characteristics vary widely from location to location. Regulation for Cloud Computing at the country level is focused on fostering innovation and funding in the Private sector, with the UK being specially active in using Cloud Computing in the Government bodies.

The type of enterprise Cloud Computing services considered in this analysis involve the abstraction from buyers of hardware ownership and control, buyers incurring in infrastructure costs as variable operating expenditures on a pay‐per‐use basis accessing an infrastructure capacity that can be scaled up or down dynamically and immediately.

And this seems to be a healthy business with a estimated cumulative market value for the main EU of 18,840 MEUR in 2008-12, with a CAGR of 19.1%, and with the year 2012 totaling 27.5% of such cumulative value, according to my estimations.

If we focus on the main EU, we see that the German market seems to be the most promising market in the main EU. France ranks second, and then Italy, the UK and Spain form a third market for opportunities:

But on the other hand, the pace of adoption in each of the countries provides a more long term, strategic picture. Indeed, the UK – that ranked the lowest in terms of cumulative opportunity – is expected to be the country that adopts the Cloud opportunity faster in 2010 – 2015 (+24 p.p.), followed by IT (+19 p.p.), IT (+17 p.p.), SP (+14 p.p.) and GE (+12 p.p.):

If we apply a recent document by Analysis Mason – which predicts that telcos will reach a 23% of the marketshare for the Cloud opportunity on a global basis by 2015 – to the previous analysis, we can provide a first estimation of the Cloud market opportunity for the telcos in the main EU by 2015:

This seems to be in line with what Telecom Italia’s CEO forecasts the Italian Cloud-sourced IT Managed Services market to be, about 300 MEUR by 2012. TI targets a share of 20 – 25 percent of the domestic Cloud Computing market. Also, the Federal Ministry of Economics and Technology estimates a potential Cloud Computing services market of €8.2 billion in Germany alone by 2015. And the CEO of Orange Business Services expects to generate around 500 MEUR in revenue globally from Cloud Computing services by 2015.

So what can telcos do to capture that business?

There are several key strengths that are attributed to the traditional telecommunication service providers:

• SHARED INFRASTRUCTURE. Cloud computing is a natural evolution for Telcos due to the convergence of IT delivery and network, Cloud services are a natural extension to what Telcos are already providing. With cloud computing, networking is part of the shared resources. It plays an important role in making everything work in an instant-on manner. And with content delivery solutions (CDN), Telcos can speed up the delivery of Web and cloud applications to employees, partners and customers. Combined with policy solutions, Telcos can do it more intelligently, i.e. not speeding up everything but understanding the content, taking into account user privileges and adjusting the acceleration of traffic.
• EVOLUTION OF MANAGED AND HOSTED IT AND COMMUNICATION SERVICES. Telcos have addressed a range of managed IT services for many years, including data centers services, managed security, hosted e-mail and PBX services.
• EXTENDED DATA CENTERS OFFERING. Telcos have very extensive networked data centers, which are very important capital items and a key component of cloud services. Telcos have focused primarily on managing and supporting networks connecting data centers, with the computing resources being managed separately. If a customer looked for a single point of contact, Telcos, in most cases, worked as sub-contractors to large IT and SI companies. Cloud computing helps Telcos add more value by delivering more than just connectivity and network support. Cloud services allow Telcos to compete better with traditional IT service providers.
• SECURITY, DATA INTEGRITY, TRUST. Security, data governance and privacy are the main barriers to adoption of cloud computing, and telcos have a long track record and reputation for data privacy and network security.
• MANAGED E2E QoS AND SLAs. VPN services provide high network availability with QoS measures, providing secure access to cloud computing as an integral part of a solution backed by E2E SLAs. And Telcos are used to design, implement, run and manage infrastructure that is always on. Today, the enterprise that can deliver instantly what a customer/user expects has a competitive advantage, as businesses need to be agile to capture opportunities presented in this instant-on world. Telcos can differentiate themselves from other providers by ensuring service quality and by bundling IT service with communication services.
• COMMUNICATION AS A SERVICE. Telcos have already embarked on communications and collaboration services which are delivered to a cloud computing SaaS model. Hosted PBX services and VoIP offerings will evolve to a full cloud computing model.
• CUSTOMER BASE AND RELATIONSHIP. Telcos have a substantial SME customer base with sales and support channels for a variety of solutions, and this is well suited to the SaaS model. Telcos have a lot of intelligence about their subscribers, their preferences, the services they consume, how and when they consume, etc, which help them add more value in a personalized service delivery. Telcos also already have a contractual billing relationship with their customers that they can exploit fully.

Telcos are  ideally positioned to capture an estimated revenue of 1,894 MEUR by 2015 in the EU for Cloud Computing, through the capitalisation of their customer base.

In terms of how will the telcos capture that opportunity, the partnership models with ISVs and IT integrators, the EU ecosystem, the Mobile Cloud, the industry verticalisation, Brokerage and Professional Services, a higher pressure towards concentration of Telcos in the EU, will be the most important trends in the role of Telcos in Cloud Computing, and this will drive important changes in the current status quo of telecommunication services providers in the EU.

Stay tuned for those changes.

Regards,

Carlos.

Sony and Ericsson, finally time to review their JV?

We have had rumours in the past that Sony would buy Ericsson’s stake in the mobile phone venture.

The WSJ has recently talked again about that possibility.

The origin of this move should be seen in a will by Sony of providing a more sound marketing strategy, and / or in a will by Ericsson to exit a shrinking business, where the later is seen as having less to do than the former one.

I don’t expect though that this move will help Sony much in increasing their shrinking marketshare, with one of the highest churn rates in the UK.

On one hand, they will not be able to compete against Apple, because the success of Apple is based on the asymmetry that they have created between products (CE) and services (music, …), unless Sony makes a similar move with their gaming business.

And on another hand, it makes little sense for them to compete against Google. Because the costs are high and increasing (royalties for patents paid to Google, cf. Samsung will pay royalties to Microsoft for Android, or Amazon to pay royalties to Microsoft for using Android in the Kindle Fire tablet?), and because there seems to be very little room for product differentiation (see the wars that have been going on between Apple and Samsung in Europe and in Australia).

Even more, Android OEM’s are increasingly wary of continuing the partnership with Google, because of the recent purchase of Motorola’s mobile arm. Mix this with (a) the growing importance of the new OSs created in Asia (e.g. Alibaba, China Mobile), and (b) the fact that RIM is could be acquired by other players, as well as WebOS, both trends can offer other possibilities to the existing Andoid’s OEMs.

The issues about the aparent lack of direction and in branding may be solved somehow, but the breakup of the 50-50 JV may not give the needed competitive edge to Sony.

All this is also perceived by the market, with Sony’s shares having fallen 3.7% on October 7th.

Although the WSJ makes a point in that “the strength of the Japanese yen against the euro is another incentive for Sony to reach a deal now”.

Regards,

Carlos.

When emerging companies compete in the Western world

There are lots of literature about how to make business in China. Lots. Not just about how to grab the opportunities there, but also about how to manage the risks.

For example, in one of its blogs, The Economists has recently pointed out what Starwood Hotels & Resorts plans not to be seen as an American company, but as a global one, with an established on-the-ground presence in China:

In Economist Education’s “Market entry strategies for emerging markets” course, a recurring theme is that one of the most effective ways to enter any emerging market is to establish an on-the-ground presence that reflects a deep understanding and respect of the local culture.

Take Starwood Hotels & Resorts, for example. The company just announced an extended push into the Chinese emerging market, and as part of that strategic initiative, will move its top executives to Shanghai for a month. According to Starwood CEO, Frits van Paasschen, “Starwood is no longer an American company that happens to run some hotels overseas…Today, we’re a global company that happens to be based in New York.”

Pending the outcome of this one-month experiment, Starwood execs may experiment with similar programs in other fast-growing emerging markets, such as Brazil, India and the United Arab Emirates.

But when will the increasing numbers of companies from developing regions recognize that they have to take a similar approach to make business in the Western world? Last week, The Economist again pointed out very correctly I believe about a Chinese champion company that:

[It] appears to want to have it both ways: remaining a culturally Chinese company, perhaps even family-run, while competing with publicly traded Western giants. This is unlikely to work.

This is one of my biggest areas of interest, i.e. how to find the right match in the Western and emerging businesses simultaneously, and why.

Regards,

Carlos.

Separating the sheep from the goats

I have been many times involved in analyzing how companies were performing.

This is generally done using financial ratios.

Sometimes, in some cases, other factors have to be examined.

E.g. in the case of the Telecommunications industry. Some vendors – ALU, NSN, … — merge or perform alliances. Some other vendors – probably the biggest case having been Nortel Networks – are integrated into others. As to the telecom providers, they buy others in the developing economies (see last year’s overtake of Vivo by Telefonica), and they, just until a few years ago, start some alliances in the mature markets in order to manage parts of what they sense to be increasingly less strategic assets: their networks; e.g. recently the Everything Everywhere JV in the UK.

These moves are important. But to who, and to what extent? The sales managers are obviously impacted because their contacts in their clients’ organizations can gain or lose weight, importance; and the sales guys’ results depends on their contacts, a lot.

When launching a new business, this can matter too. E.g. as the telecom operators try to find synergies with their competitors to manage part of their networks, or even outsource those assets, understanding reorganizations are important to try to understand when or where to expect a surge of potential business for the increasingly service-oriented telecom vendors.

But we need to separate the sheep from the goats. What are the reorganizations that really obey to some business needs, and which ones are fake and hide a loss of course?

The Economist found a historical example in the figure of Mao:

Mao was quite willing to avoid tedious or uncomfortable meetings, particularly when he was likely to be criticised. But maybe that helped him avoid getting bogged down. From the Anti-Rightist Movement of the late 1950s to the Great Leap Forward, a failed agricultural and industrial experiment in the early 1960s, to the Cultural Revolution in the late 1960s, Mao was never short of a plan.

Under Mao, China didn’t drift, it careened. The propellant came from the top. Policies were poor, execution dreadful and leadership misdirected, but each initiative seemed to create a centripetal force, as everyone looked toward Beijing to see how to march forward (or avoid being trampled). The business equivalent of this is restructuring, the broader the better. Perhaps for the struggling executive, this is the single most important lesson: if you can’t do anything right, do a lot. The more you have going on, the longer it will take for its disastrous consequences to become clear. And think very big: for all his flaws, Mao was inspiring.

Lots of examples come to my mind that I would be tempted to align with Mao’s ‘inspiring’ helm. I will not name them. But it would certainly be interesting to benchmark the companies per industry, and per chairman, in order to analyze their leaderships.

Regards,

Carlos.