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Apple and Google: Returning to calmer waters

There is an Indian proverb (or maybe it is Confucian, who knows) that says that there is no worst enemy that the one who was your best friend. And this is because he or she knows you well. In 2007, when unveiling the iPhone, Eric Schmidt, CEO of Google came on stage and announced that Google had developed specific applications for the device, and in fact, the first and probably most famous ad of the iPhone showed Google Maps. Schmidt was on Apple’s board and the two companies seemed to have found a set of synergies that allowed them to look forward to a great future together.

And then Google created Android and the Nexus. And then Google looked at what it had done and saw that it was good.

And Apple did not like it as much.  Why would Google come up with a strategy that upset its longtime partner so much? Our blog post of January 24 “The battle for the smart phone” details our views:  controlling its own destiny away from the influence of the very successful closed ecosystem of Apple or the who-knows-what-will-happen ecosystem of Windows Mobile. Google feared that at some point a company controlling the gateway between Google and the final customer could penalize its applications and favor either their own or someone else’s. For a company that so far has only been able to monetize traffic via advertising, the prospect of its traffic being disfavored was not an option.

How successful has Nexus One been so far? It took the iPhone 74 days to sell one million devices; in the same period since its introduction, Google had sold a mere 0.13 million. Granted that the market of black screen multi-touch sensitive screens is more crowded now than in 2007, but the sales of Nexus have been, in my opinion, deceiving. What effect has this had in the market cap of the company? We have said in many occasions in this same blog that the stock market is not a complete representation of a company’s fares, but it is certainly an indication of what capital markets think of it, particularly when compared with others in the same industry. The graph above shows the evolution of Apple, Microsoft and Google since January 1^st 2010. Apple has increased 13%, while Microsoft and Google have dropped 5.3% and 8.7% respectively. Capital markets, then, today believe that Apple will do better that they thought it would do at the beginning of the year. The contrary is true for Microsoft and Google.

It seems that Google and Apple will not fight the big war after all. Two days ago, the CEOs of both companies were caught having coffee together in a bar in Palo Alto. They were chatting amicably. You and I know that this is not by chance; Jobs had called Google evil not a month ago and ha sued HTC, the manufacturer of the Nexus One, for more patent infringements that one can imagine. HAving as your enemy your former best friend is not a good idea. If Google and Apple had to make a public statement that they would cease hostilities without a formal press release, is there a better way than staging a cup a coffee?

How Google's decision to abandon China is another indication that the world isn't flat

Triggered by a recent travel to India, I have started to look at the world in a slightly different manner. Of course, we all know about emerging economies, and about the India - China rivalry in particular. But the truth is that daily life normally brings us to focus on our most immediate reality, in which considerations about the "countries that are trying to reach us" are at most spontaneous and sporadical. A recent trip to India with our Global Executive MBA was not only an awesome experience -it was the first time that a IESE graduate program has visited this country- in which we learned a lot about many things (and in particular about IT and BPO outsourcing), it was also an eye-opener in a dimensions that I had not fully thought through. And this is why this blogpost, triggered by Google's announcement to reroute is searches from China to Hong-Kong, will be of a slightly different nature. 

You may think, what is the connection between this piece of Google news and a visit to India? It's actually very simple: In our visit, we had a number of Indian guest speakers, from highly known University professors to executives such as the member of Infosys' executive council Mr. Subhash Dhar or the managing director of Novo Nordisk,a scandinavic pharmaceutical multinational with a strong footprint in India. Most of them obviously anchored their talks in the Indian realities. Each of them tended to highlight a particular aspect, but there were two  facts everybody highlighted: (1) India has a very large population, and (2) India is the only emerging economy that has a long tradition of a decently functioning democracy. What does this mean? That India is the most populous democracy of the world. 

This may be obvious, but we in developed countries probably don't devote enough attention to this latter fact, when we make our business decisions of moving abroad or establishing commercial relationships. Cost matters, and very often cost matters probably too much. In traditional business, it may be enough to offer some guarantees that "general rights" of our new partner country are not being bluntly violated, and the existence of some "restricting rules" may be tolerated, since they normally don't target our core activities. But what happens if your core activity is information? Then "restrictions" become censorship. And that seems to be of a completely different category. How much censorship can we support? How do we feel about information asymmetries, about information hiding? In an Information Economy, it seem fairly obvious that any intromission or attempt to control information may have huge repercussions. 

Some years ago, when Google decided to enter China, it did so saying it was probably "the hardest decision ever taken". Certainly, it was a decision of accepting -to a certain extent- an external force with very concrete interests to influence the previously completely unbiased outcomes of a search result. It was opening a door that Google had hold firmly closed until that day. Once a door is open, more open doors could follow, and reactions of "the world" were mostly of mixed feelings. Everybody saw that not doing business in China was leaving out an enormous group of people, but 

Today, the door has been closed again. This is a good sign, but there are some learnings that we should extract. To begin with, the initial decision was probably wrong to start with. Second, unanticipated consequences have probably not been taken into account enough. Third, for some years, a non-democratic regime has been able to impose its rules, profiting from the presence of a "clean image", which allowed to position the government in a more moderate way than it probably should be. And finally, the probably unnoticed, indirect effect of the initial decision on other emerging economies, who try to benefit from technological advances within a completely different general environment, following the rules of democracy, something that they perceive as being more complex, but simply much better than any other alternative. 

We in the developed world should learn from Google's experience in China, and give it another thought every time we decide what type of country we want to work with. The massive population of China, Russia, Brazil or India should not be the main driving force of our wishes to make business in those countries. In this more and more complex world, we should broaden our mindset, and take more seriously into consideration facts such as the current political regime.

This is especially true in information industries, since our decisions to outsource or offshore information processing or storing activities today may have highly undesired consequences in the future if don't choose our partner (and hence the country in which he resides) carefully. Hence, we should probably turn our heads more towards those countries that are trying to grow in a way that we would like to grow. 

Just months ago, at the Gartner Symposium/ITxpo Orlando 2009 Eric Schmidt considered that five years from now the Internet will be dominated by Chinese content. And Google did not want to miss that, saw China as part of the "global" Interent world. Today, this looks differently. What happens if the content is there, but not everybody indexes it? My colleague Pankaj Ghemawat has been claiming for decades that "the world isn't flat", and that global strategies should be redefined in order to properly take into account "differences that still matter". 

Google's announcement of leaving China is just one more evidence to this fact. It demonstrates that even the Internet (and implicitly the indexing power of Google), which has widely claimed to be a driving force for a "flat world" is subject to differences. From now on, the Information world probably won't be seen as "flat" any longer. 

Cloud Computing: Come Rain or Come Shine?

As Cloud Computing is becoming a clear alternative to traditional IT infrastructure (see a previous post), a lot of media attention has been raised regarding its security. Last week, The Economist in the article “Cloudy with a chance of rain” stated the resistance by many IT managers to adopt cloud computing based on security issues. As a matter of fact, in a recent survey by CIO Magazine, over a sample of 800 CIOs, 60% were thinking seriously about cloud computing, but only 8% had already committed themselves to implementing it.  A long the same line, a recent Forrester Research report points out that among the main reasons preventing companies from implementing cloud computing are security concerns (50%) and too immature technology (43%). No doubt, this perception is fueled with news like the breach of security announced last January by Google, when they stated that Gmail had been comprised by a malware attack originated in China.

Fundamentally, cloud computing changes the security boundary between the enterprise infrastructure and the rest of the world, a perimeter security traditionally provided by firewalls. By contrast in a cloud computing scenario, data from multiple companies can be stored and processed in the same physical server using server virtualization technology. This situation can be illustrated with the analogy of a cabinet containing files from numerous clients, all of them with some sort of access to the cabinet, as described in a recent CNN article “How Safe is Cloud Computing?”

In addition to that, cloud computing is also subject to restrictions and compliance with local privacy laws. For instance, the Data Protection Act of 95 of the European Union requires storing private data, that is to say personally identifiable data and financial records of citizens, within the bounds of the EU legal jurisdiction. Moreover, if a company chooses to store its data in an US-based cloud infrastructure, the US government reserves the right to seize and examine any of these data based on the USA PATRIOT act, designed to fight acts of terrorism. In other words, location has legal ramifications in the choice of a cloud computing provider.

However, cloud computing seems the natural evolution of computing , starting back from the mainframes in the 60s, through the minicomputers from the 70s, the PCs from the 80s, the client-server from the 90s to today’s data hosting solutions. From the three layers of cloud computing: SaaS, PaaS, and IaaS (see a previous post). The latter one, Infrastructure as a Service, provides on-demand capacity (storage, bandwidth, computing) to deploy almost any kind of application, with a pay-per-use model. Nevertheless, some applications are more suited for cloud computing than others, mainly those with fluctuating use of resources, where it makes more sense a pay-per-use model rather than investing in dedicated servers.

There is no doubt that security issues and legal issues will rapidly mature to turn cloud computing into a suitable architecture for many enterprise applications. Notwithstanding, some analysts say that cloud computing will be not a mainstream service until 2020. It is public knowledge to predict the future in technology is an impossible mission. Suffice it to say that only ten years ago, the tech bubble bursted. Although, NASDAQ Composite index never recovered its 5.000, some significant development have occurred since then. For instance in 2000, there were 360 million people on the web and today there are 1.6 billion; or from the 400 million people using mobile in 2000 to today’s 4.6 billion. Shall we wait 10 years to adopt widely cloud computing? Quoting Joseph Licklider, MIT computer and internet visionary, “people tend to overestimate what can be done in one year and to underestimate what can be done in five or ten years.” Come rain, or come shine.

The next big online trend: location-based social networks?

Recently, a lot of hype has surrounded mobile focused services known as online location-based social networks (SNs) (i.e., foursquare.com, centrl.com, gowalla.com, and Google latitude). These are largely mobile internet-based apps that let you track and share location-based information with a network of contacts (or with the general user base). This information can include recommendations (i.e. for activities or restaurants), instructions on what to do at a specific location, or even photos related to a specific location. Many of these services also "mash" together data from other location-based informational sites, such as travel websites, to provide rich location-based information for users.

Lots of interesting features have emerged from the early competitors in this area. Most of the SNs allow you to update your location at any time by pressing some type of button. Many of the companies in this area have realized that automatic location updates are a huge privacy concern, and so most of them do not update a user's location without the user choosing to do so. However, once a user chooses to update their location, this update is usually done automatically (using GPS and cellular signal locating). Some of the SNs let the user choose where they are (i.e. Foursquare.com). This eliminates many of the privacy concerns, but it also allows people abuse the system (and claim to be where they are not).

Another useful feature is real-time location-based chat (such as that found on Centrl.com). This allows people to chat with people that they identify on a map (all within the SN application). This is a fast way to communicate with multiple people in targeted areas, and it allows users to use a single system, and not have to use SMS (text-messaging) or another system outside of the SN system.

Two of the early location-based SN frontrunners have also integrated "game" features into their networks (Gowalla and Foursquare). In these networks, businesses and individuals can create challenges and virtual awards that others can obtain from "checking-in" on the SN while at a certain location / establishment (or a series of locations). Some companies are even offering customers discounts once they receive these awards, or using the awards to keep track of "frequent shopper" promotions.

While these new networks have gotten significant press, and it seems that they are being adopted quickly by the "techie" crowd, the question remains if most mobile internet users are ready for another social networking system, or if these features will needed to be integrated into existing social networks to be widely accepted.

Charging Google in Spain or Net Neutrality?

“It is evident that internet search engines use our networks without paying us anything, which is good for them and a disgrace for us” …. “this can not continue, we set up the networks (….) we do everything. This will change, I am sure.” These statements were made by Telefonica’s president Mr. César Alierta this past Feb 5, 2010 in a business school in Deusto, Spain. He is not alone in this quest of sharing the wealth “search engines” (a  peculiar way not to mention Google explicitly) amass versus the meager profits of the telcos last year. The stock market is not blind to these events, and although has rewarded Telefonica with an increase in valuation of 35% in the last twelve months (one of the best among the telcos, Verizon for example has fared worst, with an increase of 10.30%) is far form the astonishing 58.73% of Google, and this including a substantial drop of 30 points from the beginning of the year.

What is the reasoning behind Alierta’s statement? Google does use network capacity mostly when crawling the entire web and transferring to its servers a cached copy of the page it visits, but it is unlikely to be the source of Mr. Alierta’s position; and search results use practically no bandwidth. YouTube, one of Google’s properties, which in the last reported data had above 1.2 billon views per day and every minute receives for storage four hours of video, is probably a far larger source of network saturation, but if it were an independent company it would have no “cake” to share with Telefonica. The heart of the matter is not Google, YouTube, or even Apple, which has been accused by the telcos to make too much money through its App Store for the iPhone; the real issue is a stealth attack to net neutrality.

Net neutrality has many definitions, but the simplest one is that all packets that move through the networks have to be treated equally. This has a number of implications the most important one being that two subscribers that purchase the same bandwidth from an operator should statistically get the same quality of service regardless of, say, they use a P2P community to share content, watch a video through a newspaper online site, or use Skype to talk to the other side of the world avoiding hefty telephone bills. Operators generally oppose net neutrality. One of the basic strategies of any seller to increase their ability to capture rents is to price discriminate; and discriminating by the type of packet transported is an opportunity difficult to pass.

Even in a presumed situation of net neutrality there are a number of hidden (or not so hidden) strategies used by operators to circumvent it. Imagenio, the IPTV service of Telefonica, is a case in point. Subscribers of Imagenio get a reserved 6Mb/sec channel for the video signal to ensure the necessary image quality. Telefonica clients of their 10Mb/sec service do not get this “guaranteed” quality of service if they try to watch the same video channel streaming from the original site outside the Imagenio palette. One could say, then, that the network discriminates in favor of the packets labeled Imagenio, for which the company charges extra. How long will this situation last is hard to tell; if a law is passed to ensure neutrality, it will most likely stop, and if packet discrimination is allowed, we will see a number of services for which operators will charge differently, most likely P2P, streaming from sites outside the home network and that therefore do not pay to the operator of the receiver, and IP telephony as Skype and alike.

It is time to start talking about net neutrality in the open, with its pros and cons, and sooner than later come to an agreement that stabilizes the playing field, rewards players that follow the established rules, and penalizes those that do not. Although this blogger is one hundred percent for neutrality, I am a lot more for clarification. There is no worst situation than that of indefinition. 

The Other Side of the Buzz

On February 9, 2010, Google launched Buzz - the newest addition to the rapidly growing family of online social networking tools.  Borrowing heavily from Friendfeed, a part of the Facebook platform, Buzz’s feature set includes the usual suspects of real time activity streaming, photo and video sharing, as well as several bonus features, such as geo-location and content recommendations.  Currently, Buzz is offered exclusively to consumers through its integration with the existing Gmail service. An enterprise version is expected to be available in mid 2010.

The launch of Buzz had generated a great deal of ...well buzz in the blogosphere and the mainstream media with most commentaries focusing on two aspects: (1) dissecting Buzz’s feature set, and (2) pondering what the launch of Buzz means for the online social networking space in general and the likes of Facebook, MySpace, and Twitter in particular. There are some very insightful analyses on both topics out there and I would definitely encourage you to check them out.

Much less attention, however, has been paid to the role that Buzz will eventually play in the enterprise space. Perhaps, the time for this discussion hasn’t come yet - after all, the enterprise version of Buzz will not be available for at least few more months. Nonetheless, given Google’s insistence on the importance of the enterprise segment for its overall business strategy, it would be helpful to consider some key implications. So, here are a few early thoughts:

•  Why is Google launching Buzz? The launch of Buzz is a step towards making the Google Apps suite, currently consisting of basic productivity and communications tools, into an integrated multi-mode enterprise collaboration platform. Deploying such platforms to foster better work practices around core business tasks and processes is gaining momentum at the more forward-looking firms. Google’s first attempt in this area, Google Wave, was perhaps overly ambitious and has lost most of its traction due to the lack of integration with established communication means, such as email, and the scarcity of proven use cases. Google is eager to right its wrongs. By disentangling the Wave and incorporating some of its more widely accepted features, such as status updates, into the established services of the Apps suite, Google may be able to offer a much more convincing package to meet firms’ productivity and collaboration needs.

• Who will Buzz be competing against? On the enterprise side, Buzz will be up against a very different set of competitors than those currently being mulled in the blogosphere. Instead of Twitter, we will have to see how Buzz stacks up against Yammer and Chatter (a recently launched social collaboration tool by Salesforce). On a more fundamental level though, if the consumer version of Buzz is widely being seen as a jibe at Facebook, Buzz for enterprise will - perhaps unsurprisingly - escalate matters with Microsoft. Sharepoint, MSFT’s flagship collaboration solution, has been recently getting a lot of grief for its rigid hierarchical structure and inability to support free-flow real-time collaboration. There is little doubt that Google will try to take advantage of this by pushing forward its Sites solution (currently a part of the Apps suite) with Buzz providing an additional social collaboration layer on top of the Sites’ portal- and wiki-like capabilities.

• Can Buzz be successful in the enterprise? Trying to answer this question months in advance of the actual solution launch seems a bit premature. Yet, a few general thoughts wouldn’t hurt. First, Buzz is unlikely to take the enterprise by storm. Instead, much like Google Apps, it will see a gradual mainstream adoption with higher diffusion rates in certain niche markets, such as SMEs, education, etc. Second, fundamentally Buzz’s success or failure will come down to the overall viability of the Google Apps suite and Google’s willingness (and ability) to tweak Buzz’s feature set. The latter will include addressing concerns currently being discussed in relation to the consumer version. Finally, in terms of the end-user adoption, Buzz seems to have an advantage that none of its direct competitors, such as Yammer, Chatter, etc., has. Because the enterprise solution will be following in the footsteps of the consumer version, Buzz’s end-user adoption may receive a significant leg up from the personal-to-business usage spillover. As the line between personal and professional becomes more blurred by the day (thanks in big part to the rise of online social media), these spillover dynamics are likely to become more important in the vendor turf battles.

Again, it is very early to say what kind of impact Buzz will end up having in the enterprise space. What is clear, though, is that business social software is gaining momentum and more vendors are turning their heads toward this space. Google is set to become the next big entrant - be sure to expect more.

Why is Google a little touchy with the iPad? Another sequel of Cloud Wars

Last October, The Economist trumpeted “The Clash of the Clouds” or the beginning of an epic battle between Microsoft, Google, and Apple. For the last two years, we have witnessed a bipartisanship in this war, which simplified to everybody against Microsoft. Google’s announcement last November of Chrome OS (see a previous post in this blog) could be interpreted as another step in this war against Microsoft’s Windows 7. So far, it looked like all the efforts, both by Google and Apple, were aimed to turn Microsoft software into a relic of the past. Not anymore. It was very clear when Steve Jobs said, “Netbooks aren’t better at anything” while introducing the new iPad as the anti-netbook device two weeks ago in San Francisco. Apple and Google are now frenemies. Both share the view of convincing consumers to feel comfortable with their applications and leaving Microsoft, but they have very different strategies to achieve it. On one hand, Google wants the consumers to move towards doing everything on their apps (Gmail, Google Docs, Maps, Calendar, Voice etc) in the cloud, using cheap netbooks, running Chrome OS.  On the other hand, Apple prefers the consumers to use iPhone OS-based apps instead in its new appealing iPad through its wall-garden AppStore.

While this simplification is taking place on the surface of the earth with the netbooks and iPads, a new complex industry has been created in the clouds mimicking the traditional three-layer architecture of computers (hardware, middleware, applications). First, we find companies like Amazon (EC2 Elastic Compute Cloud), IBM, HP, and the main Telco operators offering storage, computing and bandwidth on demand, what is called IaaS (Infrastructure as a Service). Second, a few companies like Microsoft (Azure) or Google (App Engine) are providing programming platforms to develop applications in the cloud, what is called PaaS (Platform as a Service). Last, we find a growing number of companies providing web applications from the cloud, without the need of installing a software license on your computer, or SaaS (Software as a Service), among the most popular are SalesForce, Google Apps, MSN Office Web or NetSuite. However, there some storms to overcome before cloud computing would be widely adopted not only in the consumer market but also in the corporate world.  CIOs are worried about security, privacy of data, compliance, latency, and the lack of standards.  Vint Cerf, one of the fathers of Internet, raised recently his concerns, specifically regarding data portability among cloud computing providers.

For the last six months, I have asked all CIOs I meet their position about cloud computing. The majority of CIOs see the potential of cloud computing, but most of the time they say is not the appropriate technology for their own industry, like in the Gershwin song “But not for me”. To make a forecast about cloud computing can be more complicated than a weather forecast. However, if history can serve as a guideline, one hundred years ago one the most strategic roles in corporations was the Chief of Electricity Officer. Some analysts say that cloud computing will turn IT into another utility. Who knows when and where? Meanwhile, let us keep an eye on the next battle in the clouds.

Google and China, A Bad Fit?

In a previous post on this blog, Josep wrote about how China seems to be loosening its tight control over the accessibility of internet content in that country. However, with recent developments with Google in China, the direction of these changes may be in question.

After a tough year, where Google internet services were down several times in China (sometimes for unexplained reasons), an incident recently happened which pushed Google to the limit of what they could take.

Google discovered a "highly sophisticated and targeted attack" on its systems that resulted in the theft of some of its source code. It was also revealed that this attack was part of a larger attack that targeted multiple US-based companies with internet presences in China, including Yahoo, Symantec, and Juniper Networks.

Google also found that the attackers tried to get into mail accounts of persons related to human right activities in China. The attackers were only mildly successful, but the sophistication and specific targets of the attacks were alarming. The attacks were based on a previously unidentified hole in old versions of the Internet Explorer browser. Likely, attackers infected individuals that had access to restricted parts of the Google networks by directing users to web pages with malicious code (using deceptive links in email messages).

Google had already struggled with regulations in China since releasing the Chinese version of its search engine in 2006. China has forced Google to censor their search results since they have been there. Google has been able to grab 30% of the search share in China, but search advertising has not taken off there, so they are not bringing in much revenue yet. Due to these struggles, as well as the hacking incident, Google seems to have begun to question the value of their China operations. After the incident, they announced that unless they were allowed to offer an uncensored search engine in China, they would shut down their search engine and would consider stopping all of their Chinese operations. China did not bend in response and basically said that Google would have to leave if they did not follow the rules. Further, the government denied having been part of the hacking incident.

After seeing China's strong response (as well as a drop in their share price), Google took a less tough stance. Google's CEO said, "We like what China is doing in terms of growth...we just don't like censorship. We hope that will change and we can apply some pressure to make things better for the Chinese people." Obviously, China is very important to Google in the future, but the current policies are making it hard for them to justify doing business there.

Even though Google may back down, this incident could have large implications in the near-term for foreign-based internet business in China. If companies do not feel secure operating there, they may not even enter the market, as the security risk and the cost of compliance may be too high to do business there.

The iPad, or how to unlock your Internet data from the mobile operator

If you were to design the best device possible to have the Internet in your hands, how would it look like? Now, we know how. Or at least, now we know how Apple has interpreted this challenge after more than a decade working on it. If you were to design the best business model to have the Internet in your hands, how would it look like? That's probably a very tricky question, but may this be the real question that Apple answered during the event at the Yerba Buena Center in San Francisco two days ago? 

During the past weeks, I have been following the hype about the launch of the iPad (now that we know how to call it!) with interest, and since now the dust is settling, it may be the right time for a bit of analysis and -why not?- speculation about the main areas of impact of this device. 

Since its target is, in words of Steve Jobs, "to hold whole Internet in the palm of your hands" (see video for a demonstration of features), one must firstly reflect on what this means. Is is about, as Brad Stone points out in his NYT article, "blurring the line between devices", or is it about really allowing us to get more Internet? What do I mean by this? Let me explain. 

We all like that Internet allows us to get access to all kinds of content at a very low cost. For that, we have to incur into two different types of spendings: the cost of the connection to the internet (i.e. ADSL, or a 3G dataplan, etc), and the cost of content. Telecom operators so far are delighted that Apple helped them to finally mobilize the Internet, since they have seen how adoption rates of data plans have increased dramatically since the launch of the iPhone (of course, since adoption was basically inexistent before the iPhone!). The iPad promises even more "mobile Internet", so at first sight, the iPad is good news. 

Then, let's have a look at the second part of the equation: content. Content creators  and distributors (of all formats -text, audio and video) have been suffering from the digital revolution. Most of them are still having problems to find adequate business models to be able to monetize content, especially on the distribution side. But we've seen that with a bit of creativity, bearing in mind the needs of the customers for simplicity and easiness, and tackling its need for "coolness" new viable business propositions have found their way. As my colleague Josep Valor was pointing out in his post last week, Apple succeeded in finding a way to find a profitable business proposition for a handset device in mobile telephony - while the main players are failing miserably. They had already done it before with music. Whose turn is now? 

Some claim that the iPad aims at books, and hence will mainly hurt Amazon's Kindle and other eReaders. Others claim it's mainly about games. Or video. And the news industry hopes it's about creating new ways of packaging news and information and therefore finally finding a viable business model. It may be about all of this. Apple has done its homework and presents a device that comes with an entire ecosystem of content, in which the iBooks store is a nice addition, but in which undoubtly the fact that it is compatible with most of the iPhone applications and the entire music is the main highlight. As developers are saying: this opens a new world of development opportunities. 

But there may be more. Let's go back to the access to content issue. How expensive is it today to access real multimedia content through a 3G network? Since multimedia implies huge data transfer, it currently requires a very expensive data plan. What will happen with the iPad? It has been much criticized that Apple seems to give a relatively low priority to  the need of including  3G. The first device that will come out to the market  -selling in the US at $499- will be WiFi only. One could argue that that's because of the lack of time to find agreements with the operators, with the notorious exception of AT&T. But one may also think that Apple has learned its lessons from the launch of the iPhone. 

Remember? It went out with a very similar proposition than the one that we've heard two days ago. Apple (not an operator) sells the device, the device is activated through iTunes. For the iPhone, Apple had added a revenue sharing proposition with the operator, and hence operator exclusivity was also part of the initial positioning. The first jailbreak (unlocking the iPhone) made this last part (with all its attached revenues!) fade away. What has Apple learned? That there's no point in exclusivity deals any longer. So the new iPad will be unlocked. Yes, there is a deal with AT&T, but its just a deal about a new data plan, not an exclusivity deal. The user decides what operator gets access to its iPad. No contract, pre-paid data. The user is locked into the iPad, but unlocked from the operator. This equals to an invitation to real competition on price to the operators. The AT&T deals of $14.99 for 250MB of data is a price killer. $29.99 for unlimited data. This has set a new limit to the value of data transport. This is great for the users, but must be terrible for the operators. 

It is also good news for the content distributors and owners, since with cheap(er) access to data, we will for sure consume more content! It will still imply that content distributors will have to find good ways to monetize content, but with this new proposition, Apple directly attacks the access hurdle. As they said on the iPad presentation event,  they have 75 million iPhone users. What they did not say is that they are all paying hefty data plans.  (all paying hefty data plans). How many users may they have  if the mobile Internet becomes cheap? 

So, while the discussions about the virtues or non-virtues of the device are nice, they may be missing the crucial point. 

The battle for the smart phone

Last Friday Sony-Ericsson announced its 2009 results: losses of $1.24 billion with a drop of sales of 40% from the previous year. This made me look at other phone manufacturers, like Nokia, Motorola or HTC. The latest data reported by the Finish company are for the quarter ending in September 09: 20% drop in sales form the same quarter in 08 and a quarterly operating loss of €426M. Motorola did not do too well either, with sales for this last quarter down to $5,45 billion, a drop of 27% from the same quarter the previous year; its operating income for the quarter has been positive, but the last twelve months show an accumulated operating loss of $1,98 billion. Some companies earn money in this business, like RIM (Blackberry), Apple, and HTC. Of these, RIM ($2.7billion operating profit in Fiscal 09 with sales of $11billion) is in fact more of a service provider than a hardware designer and manufacturer, and Apple with its iPhone is a mix of a designer, software developer, and most of all, an extremely smart ecosystem manager; since these companies do not report detailed accounting by product line, it is impossible to know the profitability of their hardware business. HTC is the pure hardware manufacturer of this trio, famous for it partnerships, and manufacturer of operator-branded phones since its founding in 1997. HTC has been a leading manufacturer of handsets for US and Japanese carriers and it was not until 2006 that the company sold its first HTC-branded phone. For this past 2009, the company has just released its unaudited numbers: sales of $4.5 billion (a drop of 5.03% from the previous year) with an operating income of $757 million.

These rather dismal results of the industry as a whole might be due to the current economic downturn, to more specific structural issues in the mobile handset market, or both, but there is no doubt that they should make companies think twice before deciding to invest heavily in it. And it is in this context that the January 4th announcement of the launch of the Nexus One by Google is even more interesting.

Why would anybody enter such an industry at this time? The market seems crowded of smart phones (see iPhone look-alikes) 
and one could expect reasonably desperate moves in pricing by the companies that have invested heavily in the design of these devices and need to sell them at any price above their manufacturing costs in order to recover their investment. The entrance of Google in the mobile market has to be analyzed in the context of the overall digital value system. Users, the final payer of this entire ecosystem, are increasing dramatically the time devoted to mobile surfing and will continue to do so when “surfing” will be embedded in the devices we carry with us all the time, not only our phones, but out tablets (book readers?), navigation devices, car radios, and every conceivable electronic instrument that will benefit form being connected to the cloud.

Microsoft has shown the world the importance of the operating system in the devices that thrive from a myriad of specialized developers providing different pieces of the final product that need a “connector”. Windows is the inevitable glue that allows my Dell machine to run my Adobe software. Becoming a proprietary standard in an industry is a gold mine; these are not news, and the players in the mobile space know them. In a world in which users look for usability (the current paradigm of usability being the iPhone) the mobile industry is not technically mature enough to provide great user experiences via independent providers coupled by open standards. The iPhone is a step above anyone else because Apple controls all the relevant steps of the iPhone value chain, from hardware to the OS and the application store. This imposes obvious rigidities, but ensures impeccable Apple style user experience. In this context, it is of no surprise that the integrated platforms grow (Apple and Blackberry) and the competing proprietary open multiple-player platforms lose (Symbian and Windows Mobile). What is then the role of Google? It is not a secret that the company from Mountain View wants a leading role in the information distribution industry; it plays it in PC-based information distribution, but it could lose it in the mobile space to Apple and perhaps Microsoft. In this context, Google has no choice but to try to make sure that two things do not happen when the market matured: (1) that Apple is the only game in town, and (2) that if a multiple player ecosystem develops, Microsoft owns an important piece of it and captures most of the value provided by the rest of players.

This situation has forced Google to develop Android, an operating system poised to compete head to head with Apple OS in functionality at an unbeatable price for hardware manufacturers: free. But for Android-based phones to provide an experience close to the iPhone in a short time, and before insurmountable network effects take place and the Apple device is definitively unbeatable, Google needs great hardware perfectly integrated with the capabilities of Android, something that only the companies that control both have been able to obtain: Apple and Blackberry (RIM). Therefore, Google had no choice: build its own phone. And once this decision was made, the partner of choice was HTC; its experience developing devices under other company’s specs, particularly NTT DoCoMo, made it unbeatable. And here is the Nexus One.

Keeping with the company tradition, though, Google cannot operate the same way as Apple does: it sells the Nexus only via de Internet (as it did with its shares in its IPO) and not exclusively with a carrier (as Apple did with ATT). The Nexus role in life is not to become a dominant player as the iPhone tries to be, rather, it is to be an example for other hardware manufacturers of how to integrate with Android, and to provide software and application developers a credible alternative platform to the iTunes store. The next few months will be crucial to see how the market will evolve. In a few weeks, the third player will show its cards: Microsoft will present the next version Windows Mobile (perhaps 7.0) at the Mobile World Congress in Barcelona: good luck trying to collect license fees from the money-losing handset manufacturers. It better be an astonishing piece of software.