Technology Industry

The Harvard Business Review has an interesting analysis of the viability of the “long tail” concept. In looking at comparative sales of video and music, researchers Anita Elberse and Felix Oberholzer-Gee find that the tail may be more bobbed than most people have been thinking:

Using econometric models that control for a number of possible concomitant trends, we found that sales [of video and music] did shift measurably into the tail…. Rather than bulking up, the tail is becoming much longer and flatter.Meanwhile, our research also showed that success is concentrated in ever fewer best-selling titles at the head of the distribution curve…. The importance of individual best sellers is not diminishing over time. It is growing.

Wired’s Chris Anderson, who authored The Long Tail, wrote that the research seemed sound (though personally I think that would be tough to tell unless you could see and understand the econometric models), but argued that the real issue is the definition of “head” and tail”:

“Head” is the selection available in the largest bricks-and-mortar retailer in the market (that would be Wal-Mart in this case). “Tail” is everything else, most of which is only available online, where there is unlimited shelf space.

In other words, by changing the definition of head and tail, you can end up with very different results.

I once headed product marketing at a direct marketer of programming and engineering products and presided over a collection of products that ran into the thousands. I noticed a pattern: the more products in a catalog, the better sales were. However, the additional products weren’t necessarily the ones selling. Instead, we seemed like an authoritative place to get products, and more people tried there first. As management directed us to cut the number of catalog pages, sales took a hit, although they still huddled in the most popular products.

In marketing, perception is all. I think you’d see similar patterns at Amazon.com when it comes to book sales — people go there because they can find what they want, and then statistically buy what you’d expect. So a long tail may increase “head” sales disproportionately. There’s nothing wrong with that from the view of the business, but management had better know what is working and why.

The other point is simpler. Out on the tail, you could double or quadruple your sales and still make diddly squat. Sellers who have efficient infrastructure, not inventory, can benefit from the incremental income and margin. But the content creator may find that the long tail can quickly become a long chain to jerk.

With the departure of Bill Gates, it’s tempting to call it the end of an era at Microsoft — except it isn’t. There is no real past at Microsoft. For all of its more and less successful forays into game consoles, PC games, the TV industry, online communities, advertising and mobile devices, the software giant still stands in much the same space it’s occupied for a long time.

Microsoft’s third-quarter earnings release had a revenue breakout by segment. The client, server and tools, and Microsoft Business Division segments — otherwise known as Windows and Office — represented 79.8 percent of its nine-month revenue of almost $44.6 billion. In the previous year, those products accounted for 82.2 percent of revenue.

Now look back ten years. In FY98 (according to the 2000 annual report), there were three segments: productivity applications and developer tools; Windows platforms; and consumer and other. The first two segments, taken together, totaled $13.32 billion — or 87.3 percent of the total $15.26 billion revenue. A decade later, roughly 80 percent of their total revenue still rests on two product ecosystems.

Over at Computerworld, Eric Lai offers a list of Gates’s 5 biggest mistakes — among them, letting Windows and Office become straitjackets. Every company matures and must protect its revenue. But to stay relevant, they also have to welcome the future. This is even more critical in high tech, where disruptive innovations can make winners and losers overnight.

For all his faults and the degree to which so many people dislike him, Gates did a remarkable job shifting from entrepreneur to CEO to chairman. But when Bill goes, Steve remains, and Microsoft still suffers from Reform Regret Syndrome: I’d be happy to change, if only it didn’t require so much change.

Not all of that change would need to be internal or organic, if Microsoft had a proven mechanism for acquiring and nurturing innovative ideas from the outside world. Unfortunately, it doesn’t. As Microsoft blogger Don Dodge wrote a few years ago, Microsoft’s idea of its technology-acquisition “sweet spot” includes companies costing $50 million to $200 million — and those purchases “typically fill in holes in our product roadmap.” Translated, that means the focus is on using acquisitions to bolster existing corporate planning, which isn’t much help when and if the world decides to head elsewhere.

Here’s more from Dodge that’s even scarier from a business perspective (emphasis his):

One thing to remember about Microsoft…the product groups run the company, and they all work largely independent of each other. They make the decisions about what to acquire and when. There are acquisition teams but they tend to be called in to execute the deal after the product groups have decided what they want to do. So, there will not necessarily be a high level strategy that all these acquisitions fit into, but they make sense on an individual basis.

No kidding. It’s a recipe to stay where you are. Last year, Dodge told us much the same thing: “The top 5 growth areas are all in Microsoft’s traditional Windows, Servers, and Tools businesses.”

I have a suggestion for Ballmer & Co.: Keep the existing engines of commerce humming as you have, but go forward differently. Of that $44.6 billion you would have spent on Yahoo, take out $500 million. Run a contest to find the hundred best ideas in high tech. Forget Windows add-ons or new Office features; you want big, bold, innovative, and daring. People submit their ideas and your panel chooses the top hundred. Each becomes a start-up with $5 million funding and business help. Out of that hundred, maybe a few will turn into something enormous, like the next Facebook or YouTube, and dozens that will become solid companies. Microsoft as VC — they could do a lot worse. Oh, wait, they already have.

Given the recent news of LinkedIn’s billion dollar valuation, I thought some results of a market research analyst firm In-Stat March 2008 survey looked interesting. Premium services in social networking and similar Web 2.0 offerings are clearly going to be an important revenue stream. So far, the generally accepted conceit is that people aren’t willing to pay for most Internet services, and unsurprisingly, the survey found that most people weren’t shelling out for premium services or features. But the problem may be with the service providers, not the customers:

If consumers believe that the quality of services or features offered on social networking sites is not currently worth the money, then we can expect that as network operators improve service offerings, consumers will be drawn to these features and services over time. Supporting this notion is the significant response that came from the 18-24 year-old group – the largest group of social network users. A majority of these respondents indicated a lack of desired premium services and features. In-Stat interprets this to mean that if compelling premium services or features of increased value were offered, the respondents would have increased willingness to pay for them.

Granted, asking people what they would or wouldn’t do under hypothetical circumstances is one of the least reliable types of market research you can get. But if this survey is representative — and I haven’t seen the methodology or sampling method used — then perhaps the companies aren’t doing enough work to find out what their customers really value. Unless you can understand your customers’ perceived value, it’s hit or miss whether you might offer them something they’d find attractive enough to pay extra.

Shortly after venting about the business drawbacks of giving control of technology to others, I came across an interesting piece in Wired by Bruce Schneier about “kill switches” in everyday technology. Microsoft, it turns out, has even filed a patent for a “digital manners policy,” so that cell phones could receive orders to switch to vibrate during a play or shut off in an airplane.

Schneier thinks that this is really about media companies wanting to control consumer use of video, audio, and text. Perhaps, but let’s leave the moral and ethical issues to others for the moment. There are plenty of considerable problems that face tech companies that enable such schemes.

Once we go down this path — giving one device authority over other devices — the security problems start piling up. Who has the authority to limit functionality of my devices, and how do they get that authority? What prevents them from abusing that power? Do I get the ability to override their limitations? In what circumstances, and how? Can they override my override?How do we prevent this from being abused? Can a burglar, for example, enforce a “no photography” rule and prevent security cameras from working? Can the police enforce the same rule to avoid another Rodney King incident? Do the police get “superuser” devices that cannot be limited, and do they get “supercontroller” devices that can limit anything? How do we ensure that only they get them, and what do we do when the devices inevitably fall into the wrong hands?

Keeping all that in mind, what kind of potential liability do companies now face? When a consumer’s home is burgled, or someone beaten by the police — or a business user loses thousands of dollars in work when a device is ordered to shut down at an inopportune moment — who do you think is going to be named in the inevitable lawsuit? It will be the manufacturer that failed to “adequately warn” said consumer or user of the dangers, not just in general, but for each and every specific situation that the person did not anticipate and should not have been expected to anticipate. And then the shareholders and directors are going to demand an answer to why corporate management didn’t anticipate the liability problem when it cooked up the scheme in the first place.

I got a link to an interview transcript from On the Media, the NPR program about the media industry, and had to pass it on because it’s one of the smarter discussions on technology and the Internet I’ve seen in a while. Jonathan Zittrain was hawking his new book, The Future of the Internet and How to Stop It. His point was that when companies try to own all aspects of a technology, they block out the possibility of real innovation.

Zittrain’s first example is how Apple has shifted its business model. Originally, people began bought the Apple II units in part because VisiCalc was available. Now Apple has to approve third-party software written for the iPhone.

JONATHAN ZITTRAIN: Problem number one is no more surprises. You don’t get two guys in a garage cooking up something like the spreadsheet — Internet telephony like Skype, Kazaa and other peer-to-peer music sharing, email — the World Wide Web itself came from a physicist who was goofing around. So to lose that ability to be able to cook up something and send it around and see whether it works, that would be a terrible loss.

He didn’t have to go back that far. Apple has been a corporate control freak for many years. One of the big reasons that the PC and Microsoft took off so quickly was because no one company owned all aspects of the overall system, while so much of the Mac belonged to Apple. Microsoft is no saint, but the split of control between OS and hardware is a major reason why the PC has something like 95 percent market share. But I hadn’t thought about vertical and horizontal control of a product not only stifling innovation, but creating a channel for governmental control.

TiVo sued EchoStar not long ago for patent infringement. They said that EchoStar made a digital video recorder that was too much like a TiVo. They won, and EchoStar owes them 90 million dollars. But then they asked for something more. They got an order from the judge that said within 30 days, EchoStar had to fry by a remote upgrade all but a handful of the EchoStar DVRs already sold and placed in [LAUGHING] living rooms around the world.

As he put it, in many homes, the EchoStar became the EchoBrick. Suddenly what you bought is no longer yours, because someone else can control it.

But this isn’t a freak occurrence. When a PC is connected to the Internet, all sorts of programs phone their corporate home and look for “upgrades.” In many cases, the user doesn’t even know it is happening. What happens when the upgrade bombs and turns the PC into a brick? What happens to customer relations? And who wants to become part of a government operation and wind up needing congressional immunity, like the telecom carriers? Companies like to control markets, but particularly in the high tech world, the controlling hand can come back to choke you, like an economic Dr. Strangelove.

In the face of overwhelming competitive odds, hostile investors, and key employees jumping ship faster than a microprocessor can count, Yahoo management is taking the tried and true way to face adversity: reorganization — its fourth in 18 months.

VentureBeat is finding the situation predictable because so much upper management has taken a hike in the last few weeks:

What exactly is going on behind the scenes with Yahoo/Microsoft/Google is not entirely clear, but Yahoo needed to make these moves to solidify its company. Oh, and billionaire investor Carl Icahn who is trying to lead a hostile takeover of Yahoo probably still wants cut off that pesky head entirely.

No wonder Icahn wants to see heads roll – it would take singleminded determination to intentionally make as many mistakes as Yahoo’s management and board have done. (Portfolio.com has a pretty funny take on the latest shareholder letter from Yahoo.)

I don’t even want to think about the new structure in detail, because the problem with this “tried and true” solution — particularly if a company has used it multiple times in a short period — is that it’s tired and a trap. In such cases, reorganization is not an attempt to get to the root of a problem, or even to keep things temporarily afloat, so much as it is a search for a scapegoat and a delaying tactic to keep the people at the top where they are.

At this point, you’ve probably heard that LinkedIn raised $53 million, mostly from Bain Capital Ventures, which translates into a $1 billion valuation. That leaves us with the obvious question: Can the company really be worth that much? There have been lots of wild numbers on the social-networking front recently, including the $580 million that News Corp. paid for MySpace in 2005 and Facebook’s $15 billion valuation courtesy of Microsoft’s minority stake last year.

But LinkedIn is performing a lot differently than its social-networking cousins. The business-oriented site means business – and revenue. Valleywag reported last November that Nielsen/NetRatings numbers showed LinkedIn outgrowing Facebook between 2006 and 2007. Even though it doesn’t have as many members, it has people who apparently are willing to pay real money, as the NYT linked above notes:

LinkedIn will get only a quarter of its projected $100 million in revenue this year from ads. (It places ads from companies like Microsoft and Southwest Airlines on profile pages.) Other moneymakers include premium subscriptions, which let users directly contact any user on the site instead of requiring an introduction from another member.A third source of revenue is recruitment tools that companies can use to find people who may not even be actively looking for new jobs. Companies pay to search for candidates with specific skills, and each day, they get new prospects as people who fit their criteria join LinkedIn.

LinkedIn is set to undergo a radical shift in strategy to find other sources of revenue. Instead of catering primarily to individual white-collar workers, the site will soon introduce new services aimed at companies. It is a risky move that could alienate members who prefer to use the networking site to network — without their bosses peering over their shoulders.

I don’t want to seem like a LinkedIn cheerleader, although I have used the service (disclosure: I have a free full account that I got from the company to test it). But I’ve put in enough time in corporations, management, and marketing to know that paid subscriptions mean happier advertisers. It’s the difference between a free “shopper” and a major publication that has paid subscribers and news stand sales.

People who put money down are considered better prospects by advertisers, because that’s what experience and testing has consistently shown over decades of market research. And the worry about companies seeing what employees are doing is likely a non-starter, because chances are that some managers at any given business already have accounts and can see what their employees are doing.

These numbers also aren’t out of the blue. Let’s take a quick look at the recent past. The Linked Intelligence blog, which covers LinkedIn but is independent of the company, reported some of the reaction to the company’s $13 million venture round in 2006. At the time, LinkedIn projected revenues of $45 million to $60 million in 2007 and $100 million in 2008. Sound familiar? Since the company is private, there’s no sure way to compare the numbers, but assume for a second that they’re telling the truth (at least as much as private companies do when it comes to announcing revenues). Management is showing that it can make aggressive plans and still hit them.

Blogger Om Malik did some “back-of-the-envelope” estimations and came up with a market valuation of $1.04 billion, which on a per-subscriber basis made him think that LinkedIn “seems a tad overvalued, especially considering that their traffic is range bound, and the number of active uniques is showing a slight slump.” TechCrunch is working on a social networking comparative valuation model that puts LinkedIn at about 6 percent of MySpace’s value, also based on what other social networks have done.

I’m usually a cynic. Many of the valuations you see tossed about are built on the greater fool theory, that you can pay X, find some bigger dope who’s willing to pay Y, then sell off and pocket the difference. Hey, buying low and selling high is capitalism. But it’s only sustainable if you can really create enough value, and not just valuation. Eventually, if a company is to make it in the long run, it has to demonstrate that people want what it offers and that there’s a revenue stream somewhere.

Consider Amazon. I’ll admit it: When the company went public, I spoke with a consultant friend and the two of us laughed uproariously. How could it be worth $1 billion? I’m happy to admit this, because I still think we were right. Yes, the market decided what it thought the company was worth, but people were essentially paying $1 billion for a company that was losing money. To invest a billion, you might reasonably want a billion in annual revenue with 10 percent before tax profit, and even then it would take you a decade to recoup your money. That’s the difference between looking at stock value – which is as impulsive and capricious as the nerves of investors – and the actual value of the company.

But unlike so many of its dot com peers, Amazon had something real going on. In its annual reports, it showed sales of $511,000 in 1995, $15,746,000 in 1996, and $146,787,000 in 1997. That’s a faster ramp-up than LinkedIn, to be sure, but it wasn’t until 2003 that it became profitable. In contrast, LinkedIn said in 2006 that it became profitable. Profitable with revenues ascending this quickly and a business model that will expand into new lines of income? Maybe a billion isn’t so out of line after all.

Non-compete clauses in high tech employment contracts are standard fare. But these defensive efforts may actually backfire where they work most effectively.

To be sure, I haven’t reached this conclusion by analyzing reams of data, but it passes the “sniff” test. At a recent panel discussion on the subject at Harvard, several speakers agreed that companies hurt themselves in the long run when they try to block ex-employees from working. When experienced programmers, engineers, and scientists can’t work in the areas they know best, the overall technical “ecosystem” suffers. Instead of working in start-ups and jump-starting innovation, more experienced people often head for large companies:

Some instead seek employment in large companies that can defend them against litigation related to non-compete agreements, said Lee Fleming, an associate professor at Harvard who is conducting a research project into the subject.”They tend to avoid startups, which don’t have the resources to protect them,” he said. Others leave their field entirely, according to Fleming.

As a result, the companies reduce the overall amount of innovation in their geographic area which has a dampening effect of everyone. It’s as though everyone’s boats float on the same bodies of water. Punch a hole in the container and drain the water, and there is less overall for everyone. A great example is the old Route 128 circle around Boston. At one time, the entire area was hot with software and hardware research, but Massachusetts allows aggressive enforcement of non-competes, and over the years, much of the economic activity has faded. But in California, where non-competes are largely unenforceable, companies have remained innovative and competitive.

(An interesting side note: Apparently the organizers of the Harvard forum couldn’t find anyone in the Massachusetts high-tech community to defend non-competes. Akamai general counsel Melanie Haratunian was apparently initially slated to fill that role, but according to blogger Scott Kirsner, she backed out a few days before the event. Supposedly Haratunian begged off because Akamai is suing to enforce a non-compete, and worried that the former employee’s lawyer might attend.)

Strong non-competes can damage competition in two ways. On one hand, such agreements make it difficult for highly experienced and talented technical personnel to take jobs in startups and other innovative firms hoping to break new ground, because the only way those businesses can compete with larger, established companies is to hire the best people they can.

On the other hand, companies that think they’ve hamstrung potential competition get lazy. One of the great advantages businesses enjoy is adversity. When they have to solve problems, they get smart, wily, and tough. When things are easy, they go to pot. The companies that excel are those moving so fast that competitors can’t keep up. Instead of trying to hinder others, high tech businesses might instead put their resources into doing something so remarkable that it slows other companies – by leaving them stunned.

For instance, consider what panel participant Paul Maeder, a VC at Highland Capital Partners, had to say at the forum (as related by Kirsner):

Maeder observed that Washington State, where non-competes are enforceable, has produced two great tech companies: Amazon.com and Microsoft. But he noted that there had been no great operating system spin-offs from Microsoft, or online bookstore spin-offs from Amazon.

Maeder also compared non-competes to indentured servitude, and said they foster “sleepiness” here in Massachusetts. He advised employees to ask about them at the beginning of the interview process, not on the first day of work — when it’s too late to negotiate anything different (like six months instead of a year).

With Nokia’s acquisition of Symbian, it is going head-to-head with Google Android and Windows Mobile to make a run at building the top software platform for mobile phones. The problem is that all three of them could be making some bad assumptions about the way the mobile phone market — particularly the smartphone market — is going to unfold over the next five to ten years.

They all seem to be assuming that the mobile phone market will mirror the computer market, which is dominated by a small handful of platforms: Windows, Mac OS X, and Linux. The reality is that there is likely to be a much larger diversity of platforms in the mobile world.

In addition to Android, Symbian, and Windows Mobile, there is now the iPhone with its OS X-based platform. And, beyond those four, there’s a plethora of phone makers that run their own proprietary operating systems on a variety of phones, sometimes with a customized OS for each phone.

It’s going to be very hard to put the genie back on the bottle in the phone market. All of these different types of phones are already out there and will be in use for years to come. Some may argue that the smartphone market does not have as many players as the general mobile market, but the lines are blurring between standard mobile phones and smartphones.

All of this means that counting on software platforms to deliver mobile applications and services to a large number of users is probably not going to be very practical. There’s too much platform fragmentation and diversity, and that’s unlikely to change.

It is a bad milieu for developers because it means they have to do too much re-engineering for multiple platforms, and it will ultimately limit the number of applications available on all of these platforms.

To truly move the mobile platform forward, it would make a lot more sense to focus on Web-based mobile apps and the development of common browser standards. For example, if browsers could universally sense screen size, screen orientation, and display details and pass that information back-and-forth with Web programming languages, then presentation of applications could be developed to automatically adjust to different types of phones.

Some of this type of programming and browser-interaction already happens, but taking it to the next level could have a catalyzing impact on applications for mobile phones, while also serving the growing diversity of computing devices from Tablet PCs to desktops with 30-inch monitors to Internet tablets (a.k.a. Intel MIDs) to laptops with 17-inch widescreen displays.

More specifically on the mobile front, building Web programming languages to have deeper interaction with phones and even doing things as simple as full screen browsers on phones that make you forget you’re in a browser would more effectively unleash mobile applications. That would make a far more universal impact than having vendors such as Nokia and Google building separate (incompatible) platforms to vie for the attention of developers.

Jason Hiner is the Executive Editor of TechRepublic, ZDNet’s sister site in the business technology world. See his full profile and read his blog Tech Sanity Check.

Credit: ZDNet

When Nokia announced that it was ready to buy the outstanding 52 percent of mobile device OS vendor Symbian for about $410 million, the handset manufacturer’s stock started heading up, and for good reason. Nokia decided that it would make the software royalty-free open source. In one move, it had tripped up the plans of Google, Microsoft, and Apple.

You can’t use computers without an operating system, and cell phones are increasingly small computers that talk back to you. As Microsoft has demonstrated for decades, if you own the OS, you can largely control the industry. But times change, and so do people’s habits. More business users rely on portable devices to check email, keep their schedules, and do the other mundane tasks that once needed a desktop or laptop. If you don’t have a lock on the operating systems they use, you don’t have a practical lock on their loyalty, because they don’t want to learn something new.

The thing is, Nokia won’t go into this alone. Look at the list of companies that will take part, according to a CSS Insight analyst Geoff Blaber:

Before today, Symbian was owned by Nokia, Ericsson, Sony Ericsson, Panasonic, Siemens and Samsung. The new entity [called the Symbian Foundation] will be steered by a board of 10 members: five from phone manufacturers (Nokia, LG, Motorola, Samsung and Sony Ericsson) and five from network operators and chip makers (AT&T, NTT DoCoMo, Vodafone, STMicroelectronics and Texas Instruments).

That’s one hell of a consortium – one that includes the biggest cell phone manufacturers, some impressive names on the chip front, and AT&T, Apple’s first carrier partner for the iPhone. That’s got to hurt the big red fruit contingent.

This acquisition is going to be painful for Google and Microsoft, as well, according to Strategy Analytics analyst Bonny Joy:

Lower costs for the Symbian operating system spell bad news for licensable rivals, such as Google Android and Microsoft Windows Mobile. They will impact Android on volume and Microsoft on value. Symbian will match Android on zero-dollar pricing, and this diminishes one of its major competitive advantages. For Microsoft, the pressure will surely mount to cut the price of its license fees to handset vendors, which we estimate to be a relatively high $14 per unit worldwide in 2008.

Pennies count in the handset business, so cutting $14 in cost becomes mighty attractive.

Don’t take this as a simple “acquire the product and slash the expenses” strategy, either. Reuters reports that Nokia says it plans to keep all of Symbian’s staff:

“I think the job cuts would be highly unlikely in the future. There are absolutely no plans,” Kai Oistamo, the head of Nokia’s devices business, told Reuters on sidelines of a news conference.”There will be even bigger need of innovation, to be ahead of the curve, when we are making this platform. There’s never been an overflow in this industry of talented and skilled people.”

But it’s about a lot more than a few hundred million, which is ultimately small potatoes to such companies. If the Symbian Foundation can affix its image onto the face of mobile computing, through the current Symbian (and any variations it might be considering), that might provide leverage in a much wider world of information delivery and computing – exactly where Google, Microsoft, and Apple all want to be.