What's really wrong with BlackBerry (and what to do about it)

Just a couple of weeks after Research in Motion turned in a good earnings report, the death watch over the company has resumed, with Business Week magazine running a long article that mocks co-CEO Jim Balsillie (even picking on his duck-emblazoned tie) and saying that RIM needs to learn how to market as well as Apple (link).

Business Week quoted Balsillie at a press briefing:

"There's tremendous turbulence in the ecosystem, of course, in mobility. And that's sort of an obvious thing, but also there is tremendous architectural contention at play. And I'm going to really frame our mobile architectural distinction. We've taken two fundamentally different approaches in their causalness. It's a causal difference, not just nuance. It's not just a causal direction that I'm going to really articulate here -- and feel free to go as deep as you want -- it's really as fundamental as causalness."

OK, he deserves to be mocked for that. But Business Week goes on to conclude that his quote captures the whole dilemma of the company -- technical sophistication coupled with incoherent marketing.

Business Week has joined a large and distinguished group of experts taking jabs at RIM. Morgan Stanley recently downgraded RIM's stock, saying it's going to lose share faster than previously expected (link). Gartner reported that Android had passed BlackBerry to become the most popular smartphone OS in the US (link). And CNET said RIM is about to be kicked out of the enterprise market (link).

I've been getting very tired of the criticisms of RIM, because most of them seem superficial and some are petty. Yes, Android is doing well, but neither RIM nor Apple is giving away its operating system, so it was close to inevitable that Android would eventually get the unit lead. It's the default choice for most smartphone companies, so of course it moves a lot of units in aggregate. But there is room in the market for several mobile platforms to succeed. The companies Android is hurting most are Microsoft, Access, and others that were hoping to sell mobile operating systems.

Yes, RIM's not good at sexy marketing, but it has always been that way. People have been predicting its imminent doom for as long as I can remember (do you recall when Microsoft Exchange was supposed to destroy it?). My guess is that the folks at RIM are shaking their heads at all of the bad press and assuming it will once again blow over in a quarter or two.

I think that would be a serious mistake. In my opinion, RIM is indeed in danger, probably a lot more danger than its executives realize. But I don't agree on the reasons most people are giving for why RIM is in trouble, and I think most of the solutions that are being proposed would make the situation worse, not better.

The fault lies not in our ties, but in our selves. In my opinion, RIM's real problems center around two big issues: its market is saturating, and it seems to have lost the ability to create great products. This is a classic problem that eventually faces most successful computer platforms. The danger is not that RIM is about to collapse, but that it'll drift into in a situation where it can't afford the investments needed to succeed in the future. It's very easy for a company to accidentally cross that line, and very hard to get back across it.

There's a lesson in RIM's situation for every tech company, so it's worthwhile to spend some time understanding what's happening.


How a computing platform dies

To explain RIM's challenges, I have to give you a little tech industry history. When I worked at Apple, I spent a lot of time studying failed computer platforms. I thought that if we understood the failures, we might be able to prevent the same thing from happening to us.

I looked at everything from videogame companies to the early PC pioneers (companies like Commodore and Atari), and I found an interesting pattern in their financial results. The early symptoms of decline in a computing platform were very subtle, and easy for a business executive to rationalize away. By the time the symptoms became obvious, it was usually too late to do anything about them.

The symptoms to watch closely are small declines in two metrics: the rate of growth of sales, and gross profit per unit sold (gross margins). Here's why:

Every computing platform has a natural pool of customers. Some people need or want the platform, and some people don't. Your product spreads through its pool of customers via the traditional "diffusion" process -- early enthusiasts first, late adopters at the end.

It's relatively easy to get good revenue from the early adopters. They seek out innovations like yours, and are willing to pay top dollar for it. As the market for a computer system matures, the early adopters get used up, and the company starts selling to middle adopters who are more price-sensitive. In response to this, the company cuts prices, which results in a big jump in sales. Total revenue goes up, and usually overall profits as well. Everybody in the company feels good.

Time passes, and that middle portion of the market gets consumed. Eventually demand growth starts to drop, and you make another price cut. Sales go up again, sometimes a lot. With revenue rising, you and your investors talk proudly about the benefits of reaching the "mainstream" market.

At Apple, when we hit this point we called our low-cost products the Macintosh Classic and Macintosh LC. At Palm, it was the M100.

What you don't realize at this point is that you're not "reaching the mainstream," you're actually consuming the late adopters. Unfortunately, it's very difficult to tell when you're selling to the late adopters. They don't wear signs. Companies tend to assume that because the adoption curve is drawn as a smooth-sided bell, your demand will tail off at the end as gradually as it built up in the beginning. But that isn't how it works. At the start, you are slowly building up momentum from a base of nothing. That takes years. But by the time you saturate the market you have built up huge sales momentum. You have a strong brand, you have advertising, you have a big distribution channel. You'll gulp through the late adopters really rapidly. The result is that sales continue to grow until they drop suddenly, like a sprinter running off the edge of a cliff.

The chart below illustrates how the process works:



Until you get close to the end, your revenue keeps rising, enabling you to tell yourself that the business is still in good shape. But eventually you reach the dregs of the market, and sales will flatten out, or maybe even start to drop. You cut prices again, but this time they don't increase demand because there are no latent customers left. All the cuts do is reduce further the revenue you get from selling upgrades to your installed base. The combination of price cuts and declining sales produces a surprisingly rapid drop in revenue and profits. If you want to make a profit (which your investors demand), your only choice is to make massive cuts in expenses. Those cuts usually end up eliminating the risky new product ideas that are your only hope of re-igniting demand.

At Apple I called this the platform "death spiral" because once you get into it, the expense cuts and sales declines reinforce each other. It's almost impossible to reverse the process, unless you're Steve Jobs and you get very lucky.

The best way to survive is to stay away from the cliff edge in the first place. But that means you need to be hyper-attentive to small changes in sales growth and gross margins. Which brings us back to RIM's situation.


Dissecting RIM's financials

At the top level, RIM's financials look utterly fantastic:

RIM Revenue and Profit

Fiscal years. Dollars in millions.

Since fiscal 2003 (when it turned profitable), RIM has grown from $500m revenue to over $15 billion. That's 30X growth in eight years. The BlackBerry subscriber base has grown from 500,000 people to about 50 million. Throughout that period, the company's net income has hovered at between 15% and 22% of revenue.

This is one of the most impressive business success stories of the last decade, and most CEOs in any industry would kill to have that sort of results. Considering how much turmoil there is in the smartphone market, RIM's senior managers must feel extremely proud of their success, and more than a bit bewildered that people keep criticizing them.

And that's exactly my point. Looking at the high-level financials can lull you into a false sense of security if you're managing a computing platform. You have to really dig to find the warning signs. That's especially hard to do in RIM's case because the company has several different sources of revenue: device sales, service revenue, and enterprise server revenue. The overall results they report are mashup of all three revenue streams. To understand what's really happening, you have to tease them apart. Here are some key data points.

First, let's look at the total number of BlackBerry subscribers:

Total BlackBerry Subscribers

RIM's fiscal quarters. Units in millions.

Pretty impressive growth. But remember, we're looking for subtle signs of saturation. Let's look at the number of subscribers added per quarter...

Net New Subscribers Per Quarter

RIM's fiscal quarters. Units in millions.

This is where you get the first little twinge of discomfort. Until a year ago, the rate of growth of BlackBerry subscribers was itself increasing every quarter. In other words, RIM added more new subscribers each quarter than it had added in the previous quarter. But for the last four quarters, RIM's subscriber growth has plateaued at around 4.7 million net new subscribers a quarter. The company's still growing, but it looks like the rate of growth may be flattening. That might imply the beginning of saturation.

Next let's look at net new subscribers as a percent of total BlackBerry units sold.

New Subscribers Added Per Unit Sold

RIM's fiscal quarters.

This one's a little disquieting as well. Five years ago, RIM was getting .7 new subscribers for every BlackBerry sold. In other words, most of its sales were to new users. Today, RIM is getting .37 more subscribers per BlackBerry sold, and that figure is at an all-time low. To put it another way, RIM now has to sell more than two and a half devices to get one more subscriber. Either RIM is selling most of its units to its installed base, or it is having to bring in a lot of new customers to replace those who are leaving for other devices. My guess is it's a mix of both.

If you look closely at that chart, you'll notice a curious bump in the line at Q4 of 2009. The percentage of new subscribers went back up all of a sudden. What did RIM do to produce that growth? A look at device gross margins tells you.

Device Gross Margin Percentage

RIM's fiscal quarters.

[Note: RIM does not report separately the gross margins it gets in the devices business, so I had to estimate this number using the company's hardware revenue and the total cost of goods sold across all of its businesses. Most of RIM's total COGS are hardware expenses, but they also include some server costs associated with providing e-mail service. That means my calculation understates RIM's device margins by a bit. But as the company grows, server costs should go down as a percent of overall costs (because you get better economies of scale). So apparent hardware margins should be going up over time. That makes the fact that they're declining all the more ominous.]

RIM increased new subscriptions by substantially cutting the profit it makes per device. What happened is that the BlackBerry Bold, Storm, and Curve all came to market with increased features, replacing older devices that were much cheaper to build. That should have produced only a one-time hit to margins, though -- they should have gone back up as component costs on the new phones declined. Instead, margins have stayed down ever since. Why? Let's look at the what RIM gets paid for each BlackBerry it sells:

RIM's Revenue Per BlackBerry Device Sold

RIM's fiscal quarters. Hardware revenue per unit sold.

This chart shows the average price the carriers pay to RIM per phone, prior to the discount they put on the phone when you sign up for a contract. The line looks pretty flat, and in fact through the middle of fiscal 2009 RIM's price per unit was very stable. Then in Q3, with the introduction of the new devices, RIM gets a temporary spike in revenue per unit. The new phones are selling at a premium. But that goes away in the next two quarters, and then about a year ago, RIM started cutting prices. Today the company gets about $50 less per unit than it usually did in the past.


When you assemble the big picture, it looks like this: To keep growing, RIM has been forced to reduce margins and prices. Despite the cuts, the rate of growth in subscribers appears to have flattened out. And more and more of the sales mix is going to existing users, or user replacement, rather than new users. RIM starts to look like a company that's working harder and harder just to stay in one place.

The picture gets more ominous when you look at some recent surveys of smartphone user satisfaction. In JD Power's 2010 smartphone satisfaction survey, BlackBerry finished near the bottom, with below average ratings in every category except battery life (link). Just three years earlier, as the iPhone was coming to market, BlackBerry had the highest satisfaction ratings in the industry (link). I don't love JD Power's methodology (for reasons that are too long to explain here), but no way should RIM's rating be declining like that.

The low satisfaction is starting to threaten RIM's future sales. In June of this year, Nielsen released some tidbits from a survey of the future purchasing plans of smartphone users (link):

OS Preferences of People Planning to Replace Their Smartphones


The chart shows US smartphone users who were thinking about buying a new device in Q1 of 2010. More than half of the BlackBerry users considering a new smartphone were leaning toward a different OS.

If I were working at RIM, that chart would scare the crap out of me.

The company is by no means dead, but the symptoms of a stalling platform are definitely there. If you work at RIM and are reading this, here's what I want you to understand: Your company's at risk. Your great financials mask that risk, and give you lots of logical-sounding reasons to avoid making the changes that need to be made. RIM is like a 53-year-old man who has high blood pressure and cholesterol but tells himself that he's OK because he can still run a half-marathon. You are indeed fine, right up until you have the heart attack. Then it's too late.

Here's what you need to do:


How to avoid the cliff

To keep a platform viable, you need to focus on two tasks: Keep the customer base loyal, and add adjacent product categories.

Keeping the base loyal. This is transcendently important to a platform company. As your market matures, more and more of your sales will come from replacement devices sold to the installed base. You'll also depend more and more on a base of developers who add value to your products. If you can keep these people happy, you'll have a steady stream of replacement sales that you can build on. It won't be enough to produce the growth that your investors want, but it'll be a great foundation.

On the other hand, if these customers and developers drift away, there's virtually no way you can grow something else fast enough to offset their loss. The trick here is that the supporter base for a computing platform is like a herd of cattle. They move as a group. When the herd is contented, it tends to stay in one place. But if the herd gets restless, even a small disturbance can cause a stampede in which they all run away at once.

For example, this is the factor that HP failed to consider when it bought Palm. The Pre's small base of users and developers was a classic group of restless cattle. When HP bought the company, the first priority should have been to calm those people by promising a renewed commitment to the Pre and follow-on products. Even if HP didn't see smartphones as its long-term future, it should have focused on keeping the developers and users loyal until it had something else for them to buy and develop for. Instead, HP CEO Mark Hurd more or less killed the product line a day after the purchase (link):

HP won't "spend billions of dollars trying to go into the smartphone business; that doesn’t in any way make any sense....We didn’t buy Palm to be in the smartphone business. And I tell people that, but it doesn’t seem to resonate well. We bought it for the IP."

Ooookay, so if you're a Pre customer, do you buy again? Do you tell your friends to buy? If you're a WebOS developer, do you keep writing code while you wait for HP to decide what it'll do with that "IP" it bought?

The answer is, you run for the exit as fast as you can. HP bought a company for a billion dollars and then immediately trashed it.

Back to RIM. Your cattle are restless. If you don't believe me, go look at that Nielsen chart again. Your goal is to keep the cattle content, by feeding them a steady diet of delightful new products that deepen their commitment to the platform. RIM's record in this area is very mixed. There have been a lot of new BlackBerry products announced in the last few years, but most of them seem to be focused on copying things Apple has done rather than finding new ways to delight BlackBerry customers.

Some of the Apple imitation is probably necessary. Apple has turned a lot of features into checkoff items that are now expected from any smartphone -- a better browser, for example. If RIM didn't eventually add those features, the herd would at some point stampede away for sure.

But what I haven't seen from RIM is a vision for deepening the special features that made people bond with BlackBerry in the first place. The personal communication functionality of BlackBerry is about the same now as it was five years ago. Why in God's name was Apple the first North American smartphone company to really push video calling? As the communication beast, RIM should have led that years ago.

Instead, the latest BlackBerry devices feel a bit like an overbuilt ice cream sundae -- the original BlackBerry functionality is at the base more or less unchanged, and a bunch of gooey media toppings have been dumped on top of it. I see sprinkles, fudge, marshmallow, pineapple, whipped cream, a cherry, and a few gummy bears, but no significant improvement to the old, dried-out ice cream at the bottom of the bowl.

Inevitably, RIM can't implement those new media toppings as cleanly and elegantly as Apple did, because its platform wasn't designed for that. So what you get is a BlackBerry that endorses Apple's design direction but fails to fully deliver on it. Maybe that helps keep some BlackBerry users from leaving instantly, but it doesn't give them a positive reason to stay. Rather than playing to win, RIM is playing not to lose, and doing it poorly.

This is especially scary because RIM depends much more than Apple on mobile operators to help drive demand for its products (if you're in the US, ask yourself how many Verizon and AT&T ads you have seen for BlackBerry, versus how many ads you've seen from RIM itself). The operators follow customer interest, they don't create it. If they get the sense that BlackBerry users want to switch, they will be only too happy to facilitate that switch -- especially since they don't have to share service revenue with Android vendors the way they do with RIM.

What RIM should do. RIM need a product vision identifying a few new differentiators for BlackBerry that will resonate well with the busy knowledge workers who are at the core of its installed base. There should be no more than three of these features (because customers can't remember more than three), and they should not be copies of things that Apple is already implementing. RIM should focus on building them deeply into the product, so they are very well integrated with the rest of the device. My nominees are meeting planning, conferencing, and live document sharing.

Other smartphone companies will eventually copy these features, so RIM needs to create a pipeline of development in which it'll bring out another 2-3 new differentiators every 24 months.


Adding adjacent categories. Settling down the installed base is not enough. It's an enormous task, but all it'll do is stabilize the business. It won't produce the growth that investors expect. To get that, RIM needs to eventually add new types of product that expand its market.

Apple is a master at this process. When Steve Jobs came back, Apple had only the Macintosh. It refreshed that product line, securing the customer base. Then it added the iPod, iPhone, and iPad. Each of them targeted Apple's core market of creative, entertainment-loving people, and each of them leveraged Apple's existing software and hardware. This overlap made the new products relatively inexpensive to develop and market -- they could be sold to the same sorts of people, through the same channels, and they reused a lot of technology. Each new product line also tended to drag a few more customers back to the earlier products, so they reinforced each other.

These new products enabled Apple to grow its revenue rapidly without putting pressure on the Macintosh to carry the whole load. Apple could invest enough in the Mac to keep it a stable and very profitable business, while the new products produced the topline growth.

To understand how wickedly efficient Apple's business model is, take a glance at the R&D budgets of RIM and Apple.

Quarterly R&D Spending of Apple and RIM

R&D spending in most recent four quarters. Dollars in millions.

Although Apple has about three times the revenue, RIM's R&D spending is about two-thirds of Apple's. With just a third more money, Apple produces the Macintosh, iPod, iPhone, iPad, Apple TV, iTunes, App Store, custom microprocessors, and a suite of mobile services. RIM is producing a bunch of minute variations on a family of phones, an e-mail server, a new OS, and a suite of mobile services that also has to be individually interfaced to each operator. RIM puts much of its effort into infrastructure that has little or no impact on features that users can see and value.

Now RIM wants to add more product lines. Its first effort will be the PlayBook tablet in 2011. This will be a decisive test of RIM's ability to grow in the future, and so far the signs are worrisome. Unlike Apple's first announcement of the iPhone, the PlayBook announcement didn't show much functionality that looked fundamentally new compared to the competition (in fact, the interface looked to me a lot like a warmed-over version of Palm's WebOS). The pitch was almost all about enabling technology rather than user benefits. When you find yourself talking up the dual-core processor and symmetric multiprocessing in a consumer product, it's a sign of a serious lack of differentiation.

I'd be more hopeful about the prospects for the PlayBook if RIM had done a better job of evolving its BlackBerry products recently. Unfortunately, RIM's latest innovation flagship is the BlackBerry Torch, an overproduced heap of half-integrated features that ranks as one of the most disappointing mobile devices I've seen from a major manufacturer in years.

Yeah, I know there are some people who like the Torch. But there were also people who thought MS-DOS was easy to use.

Burned by the Torch. I recently bought a BlackBerry Torch for my wife, who needed a smartphone to manage work e-mail. We both wanted her to have something simple to use, with a keyboard that made her comfortable. She liked the Torch in the store, so we bought it for her.

The device was a usage nightmare. Even after years of working with touch screen technology, RIM hasn't managed to evolve its user interface to the point where the touch pad and the touch screen work together smoothly. Some functions are easier to perform on touch screen, and others are easier on touch pad, and so the whole interface feels muddled. But by far the more disappointing problem was that the huge number of new applications just added to the phone do not work together properly. I can't even list all of the problems we both had figuring out how to use them, but one vivid example should suffice. My wife entered a lot of contacts directly into the device's contacts app, but didn't bother to include the area code in the phone numbers. The BlackBerry didn't warn her about this.

Then she went to the messaging app and tried to send a text message to our daughter. When she tried to send the message, the app reported that it could not send to a contact without an area code. So she went back to the contacts app and added area codes.

Then she went back to the messaging app and again tried to send a text message. The messaging app reported once again that it could not send a message without an area code. It had apparently made a copy of the data from the contacts app when it was first used, and would not update the copy. So my wife then edited the contact information from within the contacts app (it lets you do that). But when she tried to save the updated contact, the phone responded that it could not accept external changes to the contacts, and deleted the change.

Next, she tried to send a message by typing our daughter's phone number, including area code, directly into the To: portion of a new message. When she tried to send that message, the messaging application did a lookup on its contacts database, changed the phone number back to the version without an area code, and then reported that it could not send the message because the phone number lacked an area code.

Using the BlackBerry Torch is like being trapped in a real-life version of "Waiting for Godot."

I've seen this sort of incoherent design before. It happens when you have several teams working on parts of the device, and you haven't done proper planning up front to make sure the apps will work together well. It is a symptom of an out-of-control development process. The fact that this happened on RIM's flagship product is deeply disturbing. If the same incompetent processes are applied to the PlayBook -- a much more complex product with a lot of new functionality -- it is almost certain to fail.

By the way, we returned the phone.

What RIM should do. To fix this problem, RIM needs to create rigorous up-front planning processes in its software team, with someone who has dictatorial power placed in charge of overall software integration for a device or OS release. Also, the product manager needs to be empowered (actually required) to delay shipment of a product if it's not right. I'm sure someone at RIM knew about the problems in the Torch. The fact that the company went ahead and shipped it is almost as disturbing as the problems themselves.


Rescuing RIM

To sum up, RIM is at risk because its natural market is saturating and many of its customers are considering a switch to other platforms. The company may be able to bumble along in this situation for years before the problem comes to a head, but once a migration away from BlackBerry starts it would be almost impossible to stop. So if the company wants to ensure its survival, it needs to act now. Two steps are needed:

--The BlackBerry line needs to be given a several fundamental, visionary innovations that will give its core customers a reason to stay; and

--The company needs to change its development process to guarantee proper design and integration in all of its products.

Given the time needed to create a new product, these changes will take at least 18 months to bear fruit, probably more like two years. During that time RIM will remain at risk of a platform collapse. What's worse, the company's engineers already have their hands full copying iPhone features, customizing phones for a huge range of operators, and simultaneously creating a new operating system and developing a new version of the current one. The sort of changes I'm suggesting would disrupt that work, forcing the cancellation of some projects and slips in the schedule for others. They would make the problem worse before they make it better. In the meantime, the company would lose serious revenue, and might even miss earnings projections for a quarter or two. The stock's value would be trashed, and there would be calls for firing management.

As the founders of the company, Jim Balsillie and Mike Lazaridis could probably pull this off without losing their jobs. And I know they have the courage to make big changes. But I doubt they can see the need, or especially the urgency. Their current processes and business practices got them to $15 billion in revenue; why should they change now? It's much more prudent to focus on making the numbers for next quarter.

That's probably just what RIM will do. And if it does, that's why the company will probably eventually fail.

==========

[Edit: Since this post is still getting a lot of traffic, I wanted to let you know that I've posted a look at RIM's Q3 FY 2011 financials, with  updated charts and a deeper look at international sales.  I think the situation is both better and worse than I originally believed (link).]

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Why did Apple give in?

I've rarely been so happy to be wrong as I was yesterday when I heard that Apple had relaxed some of the restrictions it puts on third party software apps for iOS. In case you somehow missed the news, iPhone and iPad apps can now be written in third party languages like Flash and Java. Apple also changed rules that would have made it difficult for outside advertising systems like Google's AdMob to insert ads in iOS apps.

I'd predicted a couple of months ago that Apple probably wouldn't give in on those terms, so it was a surprise -- but a very pleasant one, for a couple of reasons. First, and most important, I think it's good for app developers. The more ways they have to create apps, the more easily they can do business. But speaking as someone who's working on a startup, I was also personally pleased. We're doing a lot of development work in Java, and I'd been worried about the rework if we decided we needed a native client on iOS. Now the problem's solved (or at least it should be by the time we ship).

Although Flash and Java are getting all the attention in the press coverage, Apple's decision also has a huge effect on some smaller companies making development tools. For example, the folks at Runtime Revolution, who make one of my favorite prototyping tools, announced instantly that they'd be supporting iOS (link). And I'll be interested to see if the StyleTap Palm OS emulator will now be able to run on Apple devices that haven't been jailbroken.

This leaves us with the question of why Apple changed its policy. The Wall Street Journal speculated that Apple might have been trying to forestall legal action by the US government (link). The New York Times said it was a competitive response to Android's increasing momentum (link).

I wonder if Apple wasn't also influenced by the Library of Congress' recent ruling that phone companies can't use copyright law to prevent jailbreaking of phones (jailbreaking in this context permits a device to run applications that weren't approved by the manufacturer). Although jailbreaking is rare on iOS today, with the ruling companies were free to start promoting it. Apple may have felt that it was better to loosen up the rules of the App Store, rather than risk a lot of customers bypassing the store entirely.

They're all plausible explanations, and there's no reason why they couldn't all be correct. But I hope there's something deeper going on. As I've written before, when a company reaches a certain level of success, many of the business practices that were foundational to its growth can turn into liabilities. It's kind of like watching a kid grow up -- behavior that's understandable in a 10-year-old ("You got in a fight with Johnny? I'll get the Neosporin.") becomes antisocial in an adult ("You got in a fight with Johnny? You're under arrest.")

Apple has definitely reached that transition point. The aggressive business tactics that were acceptable for scrappy underdog Apple look like bullying and arrogance in industry leader Apple. Companies usually stumble on this transition, because their image of themselves doesn't change to match their altered role. When Microsoft hit it at the end of the 1990s, it responded with denial, aggressiveness, and defiance. The result was years of incredibly distracting litigation. The company has never been the same since.

Has Apple learned from Microsoft's lesson? Understanding Apple's internal decision-making is only slightly easier than understanding North Korea's, so we probably won't know for sure until years from now when somebody retires and writes a memoir. But I hope, for the sake of everyone in the Apple ecosystem, that this is the start of a kinder, gentler Apple.

Assuming it is, here are a few guidelines on how Apple the Leader should behave:

Aim to cripple, not kill. The old Apple routinely reached for the nuclear weapons when threatened by an outside firm. (Remember Power Computing? link) That was OK when Apple's own survival was at risk, but it's bad form for a company that's too big to fail. Instead, your goal is to damage your competitors to the point where they can't threaten your survival, but are still somewhat viable. Remember, dying competitors file antitrust suits; weak competitors are just whiners.

If you can't think of something nice to say about someone, lie. Apple has thrived on the drama of competition against the evil overlord (go rewatch the "1984" commercial if you want to understand how deeply this is a part of Apple's psyche). This confrontational style has seeped into public communications ranging from Apple's Mac vs. PC commercials to Apple's bitter statements about Adobe a couple of months ago. That all has to stop (and, interestingly, the Mac vs. PC ads already did). For a huge company like Apple, beating up on competitors makes you look like an arrogant bully. Repeat after me: "They're an impressive company, and we respect their accomplishments." It'll feel gross for a while, but you'll get used to it.

Pick your fights. Let go of issues that don't truly threaten your survival. Flash is a perfect example -- although in theory it's threatening, in practice Adobe has shown very little ability to turn it into a major cross-platform app environment. In fact, the whole Flash/Air thing was fading into obscurity until Apple gave it a big boost of publicity by attacking it. Hey, Apple -- you helped old, bureaucratic Adobe position itself as the spunky competitor against your Microsoftian monolith. Was that what you wanted?

The right way to contain the threat from platforms like Flash is to make sure Apple's own platform continues to innovate rapidly, and take better care of developers than anyone else.

Listen carefully. Because your instincts are tuned to the old rebel Apple, you're likely to mis-position yourself frequently while you learn the new rules. Admit to yourself that you have a problem, and manage it proactively. In the era of the Internet, there's no excuse for being blindsided by an issue. Right now you're putting out fires after they become obvious. If you listen carefully, you can respond to an issue before the firestorm builds up.

Occasionally admit you're wrong. People love a powerful person who's willing to admit being wrong. It makes you look humble. The same thing applies to companies. When you realize you need to back down on an issue, don't try to hide the fact. Tell people you listened to them and decided you were wrong. You got halfway there in the statement about the App Store changes: "We have listened to our developers and taken much of their feedback to heart." You should lose the phrase "much of" because it reads as a cheap shot; it implies that some of the things developers said were not worth paying attention to. And what I don't hear yet is the second most difficult three-word phrase to say in the English language: "We were wrong."

It's possible to overdo this sort of thing, of course. You shouldn't be backing down in public more than about twice a year, or you'll look indecisive. Between the store and the iPhone antenna thing, you've now used your quota for 2010. So keep your nose clean for the rest of the year.

Stay on offense. The key to the long-term survival of Apple is innovation and creating new product categories. Once you've stopped thrashing over distractions like antennas and store terms (not to mention federal lawsuits), you can focus more time on creating the next generation iPad, and developing new category products like Apple TV. Those are the things that really matter for your future. The more time you spend on them, the better Apple's prospects. By letting go of your underdog baggage, you give yourself the freedom to make those future products great.

I'm reading: Why did Apple give in?

What I would have told the BBC about the Apple iPhone antenna, if they'd actually wanted to hear it

I got an email this morning from BBC World Service radio, asking if I'd like to participate in a debate to "discuss whether the Apple bandwagon is grinding to a halt" in the wake of the iPhone antenna problem. I said sure, and they asked a couple of questions about my views.

Unfortunately, when they saw my reply, they decided that my opinions were too similar to those of Computerworld columnist Mitch Wagner (link), who was also appearing on the program. It wouldn't lead to a good debate. They were very polite about it, and there are no hard feelings on my part.

(By the way, Mitch pointed out the most interesting line I've seen so far on the antenna issue -- Microsoft COO Kevin Turner compared the iPhone 4 to Windows Vista. "It looks like the iPhone 4 might be their Vista, and I'm okay with that." (link) That single sentence summarizes so much of what's wrong with Microsoft today: grasping at straws, in denial, not focused on what they must do to win, and a tin ear to what their comments sound like in public. The scariest thing is, I think they might actually believe the stuff they say.)

Anyway, back to Apple. I thought it would be good to share my thoughts that were too boring for the BBC. If they'd put me on the air, it would have gone something like this:


Q. On a scale of 1 to 10, how bad is this for Apple?

A. About a 1.5, with 1 being utterly meaningless in the long term. Unless there is some huge, hidden problem that Apple still isn't telling us about, the story is now over.


Q. One newspaper headline here goes 'Apple has lost its touch.' Is that fair?

A. It goes beyond unfair, it's utterly ludicrous. Apple just shipped the iPad, a major new category device, and it's selling far better than most people (including me) expected. For comparison, the Apple Macintosh, which we all cite as a huge success today, sold about 70,000 units in its first hundred days of availability (link). The iPad sold 70,000 units in the first four hours (link).

Most companies would kill to lose their touch that way.

If you want to look at a company that has lost its touch, check out BP. Or Toyota. Or Dell, which allegedly shipped twelve million computers that it knew were destined to fail (link). But even that sort of huge mistake isn't usually enough to kill a company. Remember when Intel knowingly shipped millions of Pentium processors that couldn't do math properly (link)? No, you don't remember? I rest my case.

If you want to know what Apple would look like if it lost its way, go back in time and look at the company in about 1997.

But Apple today? They made a mistake, and they handled it poorly. Hopefully they've learned from it. Giving everyone a free case is a reasonable solution. The cost of the cases is less than the cost of the accumulated bad PR (not to mention the cost of the class action lawsuits, which were the next step).

The average customer pays almost no attention to this sort of inside-the-beltway news. A company has to screw up repeatedly over a long period of time, or do something flagrant like killing people, in order to really damage its image. As long as there isn't any other big problem hidden in Apple's products, I think this story will be forgotten in a few months.


That's not to say everything is going great for Apple...
-Google Android is gaining momentum.
-Many mobile developers would love to have a better alternative to the App Store.
-Various governments might decide its walled garden approach to computing violates the law.
-At some point, I still believe the web is going to make proprietary platforms like Apple's less relevant.
-Apple is getting so big that I wonder how long it can continue to grow at the same rate.

And maybe most importantly, Apple is gradually learning that the rules of behavior for a successful industry leader are different than the rules for a scrappy upstart. Aggressiveness that's cute in a five-year-old kid will get a 25-year-old football player arrested.

Compounding Apple's challenge, its very effective marketing and design has set a higher standard for its products than the one applied to most other companies. Apple needs to learn that standing in the spotlight shows off your scars as well as your beauty marks.

One step in that process if for Apple to be humbler and more open. I think that's a lesson they started to learn this week.

(PS: I listened to BBC World's coverage of the iPhone this evening (link). One report called the antenna "the biggest PR disaster in Apple's history," which shows that BBC reporters have very short memories. As for what Mitch said, yeah it would have been a boring debate.)

I'm reading: What I would have told the BBC about the Apple iPhone antenna, if they'd actually wanted to hear it

Apple, Adobe, and Openness: Let's Get Real

There's a huge debate online about who's "right" between Apple and Adobe in the dispute over allowing Flash on the iPhone. Both companies portray their actions as protection of users and developers, but in reality what they're both protecting is their profits. There's nothing wrong with doing that -- it's what companies are supposed to do. But the only truly innocent victims in this dispute are the people trapped between Adobe and Apple.


Why Apple really doesn't want Flash on iPhone

Steve Jobs outlined his case against Flash in a recent open letter. His arguments boiled down to this:

Flash is proprietary.
H.264 video is better than Flash video.
There are lots of games on iPhone, so you won't miss the Flash ones.
Flash is insecure.
Flash makes Macs crash.
Flash is slow and reduces battery life.
Flash doesn't work well with touchscreen technology.
As an independent development layer, Flash reduces Apple's ability to innovate.

I'm not going to evaluate each of those claims; others have done a good job of that already. But none of Jobs' points except the last one explains all of Apple's actions. Apple has consistently banned not just Flash but almost all independent platforms, including Java, QT, and Palm OS emulators. One of the most poignant examples I've run across recently is Runtime Revolution, which is basically Hypercard brought into the modern era. It's a nifty tool for making prototypes and interactive media products, and its creator had been heavily committed to iPhone as a development target, encouraged by Steve Jobs' public statement that a third party developer could create a Hypercard-like product for iPhone. But Runtime Revolution's CEO killed the iPhone project last week because Apple won't allow the product to run; his story is posted here (link).

The bottom line: Apple just doesn't like other platforms.

I think Apple is sincere when it says it views these platforms as a potential barrier to innovation. But I don't think that's the whole story. Independent platforms also make it easy for a successful developer to port its software to other platforms, like Android or Symbian. This cross-platform porting is something that Apple fears because it's what allowed Windows to catch up with Macintosh.

Here's a list of some major PC software products. Do you know what they all have in common?

Photoshop
Word
Myst
Excel
FileMaker
PostScript
PowerPoint
Illustrator

The answer: They were first successful on Apple systems, and only later took off in the PC world.

I was working at Apple when this process happened, and I can tell you that it was searing. Apple had invested countless hours and dollars marketing those products as prominent reasons to buy Macs, and then we saw that investment turned against us when the apps were made available on Windows.

Do you think Steve Jobs has forgotten that experience? Look how he started the open letter on Flash:

"Apple has a long relationship with Adobe. In fact, we met Adobe's founders when they were in their proverbial garage. Apple was their first big customer, adopting their Postscript language for our new Laserwriter printer. Apple invested in Adobe and owned around 20% of the company for many years. The two companies worked closely together to pioneer desktop publishing and there were many good times. Since that golden era, the companies have grown apart."

Can you hear the resentment? It reminds me of Bill Cosby quoting his dad: "I brought you into this world, and I can take you out." I think some of the key folks at Apple remember being "betrayed" by "their" developers, and they are determined never to leave themselves vulnerable to that again. I believe it's Apple's policy to keep iPhone and iPad developers as closely tied to the platform as possible, and to make it as hard as possible for them to move their products elsewhere. I think that's the core reason why Apple won't permit Flash, or any other third party platform, to run on iPhone.

If I were still working at Apple, I would probably do the same thing. That's not to say I like the policy, because it restricts customer choice and developer flexibility. But I understand the business logic behind it, and the depth of feeling Apple folks have on this issue. To Apple this isn't just about innovation, it's about business survival.

I just wish Apple had been more specific about what was allowed and not allowed on its platform. At times the rules seem very arbitrary. For example, Runtime Revolution is banned from iPhone, but a game creation environment called Game Salad says it is allowed (link). The company claims Apple privately promised that it could continue to run, but won't say what it did to get Apple's permission. Runtime Revolution thought it was following the rules too. A platform vendor is responsible for articulating exactly what developers will and will not be permitted to do, before they invest time and money. Apple was at best sloppy about delivering that information, and at worst it changed the rules in the middle of the game.


Adobe's Flash agenda

So we have Apple trying to keep developers on the farm, barefoot and pregnant. Does that make Adobe the liberator, throwing open the gates and setting developers free? Maybe, but only to the extent that it serves Adobe's own interests.

If you want to understand Adobe's agenda for Flash, you have to look back to 2006, when Adobe bought Macromedia. Just after the acquisition, Adobe CEO Bruce Chizen gave a very interesting interview in which he discussed Adobe's plans for Flash and related technologies (link):

Buying Flash "enables us to create an 'engagement platform.' Think of it as a layer or a vehicle in which anybody can present information that could be engaged with in an interactive, compelling, reliable, relatively secure way -- across all kinds of devices, all kinds of operating systems....If we execute appropriately we will be the engagement platform, or the layer, on top of anything that has an LCD display, any computing device -- everything from a refrigerator to an automobile to a video game to a computer to a mobile phone."

In other words, Flash becomes the developer platform, and the underlying OS is transformed into commodity plumbing. Adobe's focus at the time was on competing with Microsoft (the article mentions Apple only in passing and Google not at all), but when you declare war on one OS, you declare war on them all.

I don't think you can blame Apple for feeling threatened by this. (Or Google, for that matter, which has been running its own behind the scenes war against Flash by promoting HTML 5.)

I thought it was a brilliant strategy when Adobe announced it. Unfortunately, Adobe's execution hasn't matched its rhetoric. Four years ago, Chizen said Adobe would quickly merge Flash and Acrobat into a runtime environment that would own the next generation of applications. If Adobe had moved quickly, it might have made its platform into a contender, and the software market might look a lot different today. But the new platform, called Adobe Air, was very slow to come to market, and was focused on PCs rather than mobile devices. Today it has very little developer momentum.

Adobe spun its wheels in the mobile market in particular. It insisted on charging for the mobile Flash runtime for a long time, even though it knew that free runtimes are the key to adoption. And then much of the Adobe mobile team was fired in a series of layoffs starting at the end of 2008. Adobe had hired a lot of mobile industry veterans, and by firing them Adobe created the impression in the mobile industry that it was not serious about mobile. There's a very good discussion of some of Adobe's other mobile challenges here.

Fast forward a year and a half from those firings, and Apple has completely seized the initiative with mobile developers. Now Adobe is fighting a defensive battle just to keep Flash relevant.

There's an old quote attributed to Napoleon, "If you start to take Vienna, take Vienna." Adobe failed to take Vienna. Note to other tech companies: Don't declare your intention to take over the world; do it first and explain later. (By the way, this explains both Apple's strategy and Chinese foreign policy, but I digress.)

Because of this history, I find it hard to feel a lot of sympathy for the troubles that Flash is having. I also find it a bit disingenuous when Adobe says that it's fighting for a "multiplatform" world (link), when the company has said previously that it really wants a single platform, led by Adobe, that runs on top of multiple operating systems.

I'm also amused by Adobe's statements that it has always been a proponent of open standards. Adobe cofounders John Warnock and Chuck Geschke wrote:

"That, certainly, was what we learned as we launched PostScript® and PDF, two early and powerful software solutions that work across platforms. We openly published the specifications for both, thus inviting both use and competition. In the early days, PostScript attracted 72 clone makers, but we held onto our market leadership by out-innovating the pack."

Actually, Adobe held onto its leadership in part by building secret, proprietary extensions to PostScript and tying its paid products to them. In an example I saw personally, Adobe's secret APIs in PostScript enabled it to create higher-quality fonts that looked better and ran more efficiently than competitors. As a PostScript developer you were welcome to work with Adobe's low-quality font technology, but Adobe refused to allow any developer to access its proprietary high-quality APIs.

Sounds like something Apple would do, doesn't it?


The real battle

So the real situation around Flash is that Apple won't permit most other platforms on iPhone (no matter how innocuous they are) because it thinks they threaten its survival, while Adobe wants its platform on iPhone so it can set a de facto standard and make money from it. Neither company is really focused on protecting developers or users as its main goal; they are fighting over who gets to use developers to make money.

Unfortunately for developers, this situation makes it more and more likely that the mobile world will continue to be split into incompatible platforms, forcing them to rewrite their programs multiple times in order to reach the broadest group of customers. Theoretically, the mobile browser could become the grand unifier of mobile development, and as I have said before I wish it would (venture capitalist Eric Ver Ploeg makes the case for it here). Unfortunately, the development of those standards has been incredibly slow and political, and after watching that process for years, it's becoming harder and harder to convince myself that it'll ever speed up. I hope it does, but I suspect that one reason Apple's willing to support web standards is because it believes it can dramatically out-innovate them.

In the meantime, Apple and Adobe will continue to duke it out. If Adobe could get customers and developers to boycott Apple products, I guess Apple might be forced to back down. Or Adobe might convince the government to charge Apple with noncompetitive behavior. But I think neither of those is likely to happen. The most likely outcome is that Apple will hold the line against Flash, Adobe will try to run Flash on every other mobile platform, we'll get a lot more posturing from both companies -- and a lot of websites will get rich running Adobe's anti-Apple ads.

I'm reading: Apple, Adobe, and Openness: Let's Get Real

Lessons From the Fall of Palm

What went wrong?

Palm is now apparently prepping itself for a remainder sale, or new sugar daddy, or some other sort of deal that will change its current trajectory. I wish them well, and I hope they can remain independent and go on to accomplish great things in the future. But whatever happens, it's clear that the current incarnation of Palm has failed. Almost everyone I talk to in Silicon Valley is already speaking of the company in the past tense.

Most of the comments I've seen online blame the company's failure on the high marketing costs associated with selling hardware:

--Ed Snyder, an analyst with Charter Equity Research, told the New York Times: “They poured all their resources into developing a killer product. But they didn’t have the resources left to go to market.” (link)

--Engadget called Palm "a company that has more talent, history, and bright ideas than it has cash and customers." (link)

--Charlie Wolf of Needham & Company told Bloomberg: "It can't get scale. It doesn't have the resources to market the Palm OS and the Pre in a way that would break through the noise." (link)

--Even Palm CEO Jon Rubinstein blamed the problem on marketing challenges: "Palm webOS is recognized as a groundbreaking platform that enables one of the best smartphone experiences available today....However, driving broad consumer adoption of Palm products is taking longer than we anticipated." (link)

The quotes reflect the tech industry's stereotypical view of hardware businesses: They require huge marketing budgets, making them incredibly high-risk, high-cost investments. That's why you see thousands of software startups in Silicon Valley and only a handful of hardware ones.

I think that's nuts. Hardware companies like Pure Digital (maker of the Flip camera) succeeded with virtually no marketing budget. Why? Because they made appealing products that filled a particular customer need. If you do that, hardware is easy to market virally. I think the lesson from Palm's failure isn't "making hardware is dangerous," it's "lack of focus in a small hardware company is dangerous."

I don't want to turn this post into an anti-Palm diatribe. As I said, I hope they survive, and I have enormous respect for the people who work there. But in the spirit of helping everyone learn from Palm's situation, here are the five lessons I think we should all take away from Palm's struggles:


1. Understand what problem you're solving. I asked this question when the Pre was first announced, and I'll ask it again now: What compelling problem does the Pre solve for what customer? (link) It's easy to answer that for successful devices:

--BlackBerry = great e-mail on the go for mobile professionals

--iPhone = the best entertainment and browsing on the go (later extended to include apps)

--Flip = the easiest way to capture video and share it online

What's the short pitch for Pre? Go check the Palm website. As of April 18, it featured three different positionings right on the front page: "Social networking at its best," "Advanced 3D games," and "Work smarter, stay connected." So it's a business / social networking / gaming tool. For all of those millions of people who want to do serious business, 3D games, and Facebook posts all at once.

This isn't a recent problem. At the time of the Pre announcement, Palm advocates described it as a device for people who want better e-mail than the iPhone and better entertainment than the BlackBerry. The implication was that there's a big center to the smartphone market that's frustrated by the lack of a keyboard on an iPhone and the lack of a music player on BlackBerry. Re-read Jon Rubinstein's quote above: "webOS is recognized as a groundbreaking platform that enables one of the best smartphone experiences available today." The assumption there is that millions of customers are looking to buy a "smartphone experience," as opposed to a tool that solves a particular problem.

If that unsatisfied center existed, Pre would have sold like hotcakes.


2. Take care of your friends. When Elevation Partners took control of Palm, the company wasn't just a famous brand. It also had a fairly large base of loyal customers and developers who had stuck with the Treo through a lot of angst and adversity. The new Palm did very little to keep those people loyal. The developers weren't given any way to bridge their existing applications to the new OS. Faced with starting over on webOS or starting over on the much larger iPhone base, guess what they chose. And Palm, which once prided itself on simplicity, made the Treo to Pre migration process into the sort of marathon experience that we used to tease Microsoft about. Here are some of the instructions from Palm's own website (link):

Decide where you want to move your Calendar/Contacts

The Data Transfer Assistant moves your info out of the desktop organizer and onto your phone. From there, your phone sends the data to the web account of your choice.

Your choices: Google, Microsoft Exchange, or Yahoo!.
Need help deciding where your info should go?

Skip this step if you already have an online account where you want to move the info from your old desktop organizer.
Create an account for one of these web services:
Google

1. Go to Google.com: Create a Google account and set up a new account.
2. If you've never used Google Calendar, you'll need to sign in at least one time before proceeding. Go to google.com/calendar, and follow the login & activation steps until you see your calendar.

Microsoft Exchange for corporate users

Ask your IT Helpdesk for these four pieces of information.

* Incoming mail server name
* Domain name (if it's different from your incoming mail server name)
* Exchange username
* Exchange password

Yahoo! Calendar & Contacts

Contacts are transferred from Yahoo.com to the phone, but not from phone to Yahoo!

1. Go to Yahoo.com: Sign up for Yahoo! and create a new account.

Or back up your info to your online Palm profile

Ready to go - you already created an account when you set up your phone.

Set up the account on your phone

After creating an online account, add it to your phone. This ensures that your info moves correctly to the account.

1. On your phone, open Contacts.
2. Open the application menu and tap Preferences & Accounts.
3. Tap Add An Account and select the account you created above.
4. Enter the username and password for that account.

Sync your old device one last time

Skip this step if you do not have a previous Palm device.

To make sure you have the most up-to-date version of your info in Palm Desktop or standalone Outlook, synchronize your previous Palm device and your computer one last time.

Export your info using the Data Transfer Assistant

For fastest results, turn on Wi-Fi (if available) and plug in the charger before proceeding.

Download the tool: Data_Transfer_Assistant_1e.exe

After the download is complete, double-click Data_Transfer_Assistant_1e.exe in the location on your computer where you downloaded it.
Follow the onscreen instructions.
Note: When you connect the phone to your computer, some applications may launch automatically, moving the Data Transfer Assistant to the background. To return the Data Transfer Assistant to the foreground, click the Data Transfer Assistant icon on your computer's taskbar....

You can find some more discussion here.

This in itself wasn't a disaster. Any company has to set priorities, and Palm just didn't make the links to its legacy customers and developers a priority. But it meant Palm couldn't draw on a pool of friends to help it get sales off to a quick start. That put even more pressure on Pre to be a knockout hit from day one.


3. Move faster and slower. After the Elevation deal, Palm went through a very strange management transition. Jon Rubinstein was installed as Chairman and head of product development, Ed Colligan remained as CEO (so he was Jon's employee and boss at the same time), and Jeff Hawkins was supposed to remain as product guru. Palm said at the time that Jon would be the execution person and Jeff the visionary. "The combination of those two guys is one of the most dynamic... combinations on the planet," Palm said. Yeah, right. The real process was a creeping reorganization in which Rubinstein replaced the old Palm executive team in stages. I think Palm would have been better off with a single quick transition in which the new team was put in place all at once and given time to coalesce.

But if Palm moved too slowly on organizational change, it probably moved too quickly on product shipment. The Pre shipped without a finished development environment, frustrating the developers who were most motivated to create interesting software on it. And it had an OS that hadn't been tuned properly for performance, so even its most enthusiastic users had to apologize for its lack of responsiveness. Although there was a lot of pressure on Palm at the time to ship, in retrospect the company would have been far, far better off if it had waited a few more months and shipped a product that delivered a great user and developer experience.


4. What you do, do well. The old Palm's "zen" design principles said: "Find a problem, find the simplest solution, punt the rest." It was an appliance design philosophy translated into computing. The new Palm tried to boil the ocean. Its ambition to create a smartphone platform superior to iPhone forced it to compete on a very broad range of fronts, everything from OS to SDK to app store to hardware. Inevitably, Palm wasn't able to execute equally well in all areas, and some of the Pre's features were compromised due to lack of resources. Apple can get away with a flawed version one product because it has the financial resources to go back and fix its mistakes. Which brings me to the fifth lesson...


5. You're not Apple. Trying to beat Apple head-on is a rich man's game, the computing equivalent of fighting a land war in Asia. There are effective ways to compete with Apple on a budget, but they all involve avoiding or neutralizing its strengths, and targeting segments or tactics that Apple can't or won't pursue. Instead, Palm attacked head on. I'm picturing that Warner Brothers cartoon where Black Knight Yosemite Sam charges at full speed into the wall of a castle and bounces off flat as a pancake (link).


What it means for the rest of us

You'll notice that I didn't say anything about Palm's bizarre ads featuring a Borg hive queen (here and here). That's because they were a symptom, not a cause. When your product is right, the message will be simple and you won't need creepy ads to stand out. Often you won't need ads at all.

The mistakes highlighted by Palm are common in the tech industry. Here's what I think we should do about them:

--I know there are device companies out there right now where the employees are whispering to each other, "we've committed to shipping on a certain date, but the product won't really be ready." You know who you are. Don't let your company pull a Pre; speak up. If nothing else works, print this post and send it to your boss. The Board of Directors might fire you if you delay the launch, but they definitely will fire you if the product fails.

--I frequently talk with companies that are creating bundles of technologies rather than coherent solutions to problems (anybody want to buy a Verizon Droid? link). Ask yourself, who is my customer, and am I solving a problem that they care about deeply?

--I know investors who say, "I'll never touch hardware, it's too risky." Understand that you're missing opportunities where you could invest with a higher return, because valuations aren't being bid up by competing investors. The fault, dear investor, is not in our product category, but in our execution.


That's my take. What do you think? Where did Palm go wrong (if at all), and what do you think the lessons are for other companies?

I'm reading: Lessons From the Fall of Palm

I'm speaking about ebooks in New York this month

I'm giving a talk on the ebook business at a publishing industry conference in New York in late February. I should have some spare time between sessions. If you're in New York and would like to chat during that week, please contact me here.

My talk is about the many ways the ebook industry has failed in the past, but my real focus is on how to avoid those problems in the future. As you know if you've read this blog for a while, you know I am pretty passionate on this subject (link). With all the recent goings-on between Apple, Amazon, Macmillan, etc, we have a lot to discuss.

Here's a synopsis of my talk. If you have any other ebook questions you'd like to see me cover in it, post a comment here.


Check Out My Scars: Seven Lessons from the Failure of Ebooks in 2000, and What They Mean to the Future of Electronic Publishing
1:40pm Tuesday, 02/23/2010
O'Reilly Tools of Change for Publishing (link)

The tech industry has a long history of celebrating its successes and forgetting its failures. We honor the IBM PC but forget the DEC Rainbow and Kaypro II. We put the iPhone and BlackBerry on a pedestal but sweep the Qualcomm PDQ and Ericsson R380 under the rug.

That selective memory is often helpful in the development of a new technology, as it prevents companies from being held back by other companies’ failures. But it also makes tech companies prone to repeating the same mistakes over and over again. So it’s useful to look back at previous efforts to make ebooks successful, both as standalone reader products and as software for other mobile devices.

When you do that, there are seven lessons that emerge for today’s e-publishers:

1. Beware the chicken and the egg. Purchasing a dedicated e-book reader is a major decision for most users. Even though reader devices aren’t all that expensive, they cost a lot more than a couple of books, and so the user needs to have a fairly high motivation before they’ll buy. But the most enthusiastic readers – the people most likely to pay for an ebook reader – are also the people who care the about having a wide selection of ebooks available before they buy the device.

Meanwhile, publishers look at the uncertainties and expenses of preparing an ebook edition, and are reluctant to convert their entire catalogs unless they’re convinced that a huge installed base of reader devices will be available.

This creates a classic chicken-and-egg situation in which the publishers won’t jump on board until there are a lot of reader devices, and users won’t buy the devices until there are a lot of books available. This was the root cause of the failure of ebook devices in 2000.

Amazon and Sony, to their credit, have been trying to power through the chicken and egg situation through very aggressive marketing and price subsidies. They have made progress, but the reader market is not yet self-supporting, in part because of issue #2:

2. Ebook customers are cheap. It would be much easier for book publishers to embrace the ebook market if they could charge more for an electronic edition than they get for a hardcover book. That way they wouldn’t worry about cannibalizing their traditional channels. The reality is just the opposite—consumers generally view an electronic edition as less valuable than a hardcover. Even though an ebook is easier to carry, it’s viewed as evanescent, without the seriousness and tactile quality of a hardcover. As a result, many people are reluctant to pay more than paperback prices for ebooks.

But the book enthusiasts who are likely to be interested in ebook devices are the sort of people who want to read the latest releases, rather than waiting for a paperback edition. They want hardcover content at paperback prices. So Amazon and Sony have been forced to subsidize the sales of ebooks, paying hardcover prices to publishers but collecting lower revenue from their customers.

This doesn’t bode well for the economics of the reader device market. Instead, a lot of people are hoping that other reader devices will emerge, like smartphones. That brings us to the third lesson…

3. Mobile usage patterns are hostile to most publishing. Most print publishing is built around the idea of an extended reading session – the customer settles down with a book or a newspaper and reads through it cover to cover. Mobile devices have a completely different usage pattern. People use them on the go – they pull out the device when they have a minute free, use it briefly, and then put it away.

The usage pattern is more like eating bon-bons than sitting down to a meal.

That means there are strong, natural limits on the amount of text content that many people will consume on a smartphone or other small mobile device. If you’re publishing a joke book, a mobile device may be the perfect distribution medium for you. But unless you are publishing in a country where most people commute by mass transit for long distances (Japan, Korea), extended reading on mobiles is likely to remain a niche for a long time.

4. Periodicals are promising. Combine points 2 and 3 and they indicate an interesting possibility for e-publishing: Magazines. Other than National Geographic, most magazines are viewed as disposable after they’re read. And many of them are read in short sessions rather than all at once. So there is not as much customer resistance to paying the full list price for an e-magazine, and the format is more compatible with a mobile device. Plus, an e-magazine can be delivered faster than a print version, giving the e-edition an advantage.

The challenge for magazines is that the ad-heavy format of a traditional print magazine does not translate well to an electronic device. On an electronic device, people expect to jump straight to content rather than thumbing past ads they way they do in a print magazine. That’s why software products that replicate a print magazine on screen haven’t taken off. The usage pattern is just different.

So the challenge for magazine publishers is to remake their business models, balancing much lower printing and distribution costs against reduced (or different) ad revenue. No one has perfected that balance yet.

5. How do you get a better experience than paper? Here are the first two sentences of Sony’s online pitch for its Pocket Reader: “Carry hundreds of books in your pocket. The Reader Pocket Edition lets you access up to 350 of your favorite books from anywhere.” The problem with this reasoning is that almost no one wants or needs to carry 350 books at once; you can only read one at a time. So Sony’s touting an advantage that’s not actually advantageous.

If they want to win over users, ebook companies need to offer a product that’s actually superior to paper. Amazon’s instant download of books is a good start, but another promising opportunity is the backlist. Even popular authors routinely go out of print on their less well-known titles, and once an author dies their work can virtually vanish from the marketplace.

For example, in science fiction the late Robert Heinlein is considered a giant in the field, but about half of his titles listed on Amazon.com are out of print.

The enthusiastic readers who make up the core market for ebook devices would respond very well to a device that made large numbers of out of print books available, but the process of getting them available has been very slow. This is another area where Amazon is making some progress through the application of money.

6. Beware the tipping point. For book publishers, there is an economic cliff lurking somewhere on the horizon. Once ebook reader devices do take off, there is a point where it will make economic success for a successful author to completely bypass print publishing and self-publish electronically.

The economics work like this: An author typically gets about 15% of revenue as royalties. But a self-published e-author could retain a much larger cut—up to 70% if e-book stores come to resemble the iPhone app store. At that royalty rate, an author would make more money as soon as about 20% of the book-buying public has e-readers.

The actual location of the tipping point will vary for different types of books, and the situation is quite different for new authors who can’t generate demand for themselves. But in general, e-publishing changes the economic balance between authors and publishers, and it would be healthy for publishers to get ahead of that transition rather than waiting for it the way the music business has done.

(In the session I’ll flesh out this analysis more, with pointers to help publishers identify where the tipping point is and what it’ll mean.)

7. Be careful what you wish for. Beyond the financial tipping point, there’s another trend that will likely affect publishing: the rise of free. In both music and consumer software, prices have been inexorably trending toward zero. On the Apple App Store, for example, ASPs are steadily declining. Authors and publishers both should be thinking now about how they’ll maintain the perceived value of written content, and what other models they might use to monetize it.

(In the session we’ll discuss what some of those models might be, based on what’s happening in other types of content.)

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A couple of unrelated links:

--We've posted the Rubicon "Competitive Idea Book," a collection of famous competitive strategies designed to help companies think about their businesses creatively (link).

--Thanks to WAP Review for including my post about the iPad in the latest Carnival of the Mobilists.

I'm reading: I'm speaking about ebooks in New York this month

iPad: The (attempted) Windows killer

(Well, you've got to admit, that's not something you'll be reading on most other weblogs today.)

Ten hours after the Apple iPad announcement, my overall reaction is that the product wasn't necessarily better or worse than I expected, but it was definitely different.

I expected an upsized extension to the iPod Touch, with a focus on watching videos, browsing, and playing games. The device can certainly do all of that, but Apple spent a huge amount of time demonstrating features I didn't expect -- e-mail management, productivity applications, and typing with the on-screen keyboard.

I know many of you think those are just checkoff items, and you may be right. We're all trying to read Apple's strategic intentions from a single product announcement, and that's hard to do. But here's how I view it: I believe Apple is serious when it spends five minutes demonstrating a feature, and I believe they actually said what they meant to say during the announcement. Specifically:

--Apple's identity is as a mobile device company.
--Netbooks suck and Apple can do something better.
--It's amazingly comfortable and easy to type on a touch screen.

(I'm not sure I agree with the last one, by the way, but we're talking about what Apple believes, and Steve sold the onscreen keyboard thing hard.)

If they really believe all of those things, then the iPad starts to look like Apple's idea of the next logical stage in the evolution of personal computing. It takes everything Apple learned from iPod and iPhone and applies that to a redesign of the low-end personal computer. It's Apple's vision of the netpad done right -- not a PC accessory, but a lightweight portable device that can replace the PC for many basic usages. The idea wouldn't be to kill the PC outright, but to nudge it toward the workstation space, in the process gradually eating away at the market share of Windows.

Yes, I believe killing Windows is still very high on Steve's personal to-do list. Always.

If you start from that assumption, a lot of the other things Apple said today make more sense. Why did they spend a year rewriting iWork for the tablet? Because you need an office suite in order to displace a PC (you don't need it for a media tablet). Why price that suite at just ten bucks a module? Because that profoundly screws up the pricing for Office on netbooks (the only way Microsoft can match that pricing is to destroy the value of its cash cow).

Why didn't we get a more comprehensive media store? I was expecting an entertainment tablet, and so I thought there would be a much more aggressive push for third party media developers. Apple did create the iBooks store, but they don't seem to be reaching out to individual authors the way I expected. And other media (video and animation) remains in iTunes rather than getting its own purchasing experience. To me, the iPad feels more like a netbook replacement that also does books, rather than a media tablet that also does spreadsheets.


Will it work?

If Apple's plan really is to displace netbooks, it faces some interesting challenges. One of the greatest appeals of a netbook is that it is a fully functional Windows notebook computer (cramped and awkward, but fully functional). Computer users have historically been very resistant to compromising on some core features. Will they accept a netbook that doesn't have a physical keyboard or a hard drive, and that can't run Flash and Java? And as Chris Dunphy (link) asked me today, will Apple give iPad applications more freedom to multitask than they have on the iPhone?

I don't know. And so I really don't know how the product will sell.

It doesn't help that the marketing for the iPad feels muddled. Apple's website tonight reads, "Our most advanced technology in a magical and revolutionary device at an unbelievable price." Ugh, it's a big bag of features. As I asked in my pre-launch post yesterday, who is it for and what problem does it solve? The question hasn't been answered crisply.

At least Apple got the base price of the product right. It's still above what I think most consumers will pay for a tablet, but Apple's within the realm of believability, and over time I hope the price will come down further. If it does, and if Apple markets it strongly, the product may be able to find its own market.


Meanwhile, I'm sure the iPad will have an important impact on some other companies. Namely...

Nokia: Step your game up. Several years ago, Nokia said it was re-creating itself as a computer company. Now Apple says it has re-created itself as a mobile company. Not just a mobile company, but supposedly the world's biggest mobile device company as measured by revenue. Whether that statistic is actually meaningful or something Apple manipulated through clever accounting, it must have driven the Nokia management team nuts -- which was undoubtedly Apple's intent.

Now Nokia has to decide whether it wants to compete with Apple in yet another product category, at a time when it already seems a bit overwhelmed. It's a very tough decision. (And please don't tell me the N900 is an iPad competitor. It's too small.)

Is Kindle in trouble? Not yet. The Amazon Kindle vs. iPad competition is going to be very interesting. My first reflex was to say that Kindle is in trouble -- iPad is a much more capable device, and the convergence advocates will tell you that a general-purpose tablet will eat a single-purpose e-reader. But Kindle is half the price of the iPad, even less when you factor in the cost of 3G for the iPad plus a service plan. Plus its screen, although only black and white, produces less eyestrain than a backlit LCD display. I don't think Kindle takes a big hit in the near term. In the long term, I am worried about Amazon's ability to compete with general-purpose tablets, but maybe Amazon's goal is to own the bookstore rather than the book reader. In that case, they should make sure the Kindle app works really well on the iPad.

The one thing I'm sure Amazon should not do is attempt to compete with Apple in the general-purpose tablet business. That's like challenging the Australian national rugby team to a drinking match.

The mobile operators: Pay attention to your pricing plans. I think this will be one of the most interesting floats in the iPad parade. Apple is now making its second attempt to bypass the subsidy model used by the operators. If Apple had been willing to bundle a two-year wireless contract with the iPad, it probably could have gotten the device subsidized down to about $299 or $350. But the downside would have been a $60 or higher monthly service plan, with soft caps on the amount of video someone could browse. It will be interesting to see how customers react to Apple's choice, especially when other companies sell subsidized net tablets for very low initial prices. In the phone market, Apple had to give in and accept the subsidy. We'll see if history repeats itself.

It will also be interesting to see how AT&T makes out with the revenue from iPad subscribers. At first glance, $30 a month for unlimited data sounds like a bad deal for AT&T. But keep in mind that data plans usually include several hundred dollars for the subsidy; the operator supposedly doesn't even turn a profit until sometime in the second year. With these plans, AT&T makes money from day one. So it may be able to make a better profit than you'd expect. Still, it seems a bit odd for a company with a network as congested as AT&T's to be adding a device designed to stream high-quality video from the web.

PC application developers: Pain. If the iPad really is Apple's vision of the future of personal computing, it's an ugly world for today's PC application developers. By pricing the pieces of iWork at $9.99 each, Apple has effectively created a price ceiling for major productivity applications. How many PC app companies can make money at that price per unit? And remember, that's the ceiling. It's time to start rethinking your business model...


No matter how well the iPad sells, it's a very interesting experiment worthy of the Apple brand, and I'm sure it'll drive a legion of imitators from Asia. I wish we had a few more hardware companies like Apple who were willing to mix up the market like this; innovation would move a lot faster.

I'm reading: iPad: The (attempted) Windows killer

Quick take on the Apple iPad: It's a PC, sort of

I need some time to think about it, but after listening to the feed of the announcement and chatting with my friend Chris Dunphy, my quick reaction is that the iPad is more like a PC than I expected. That's not necessarily a bad thing. I had been thinking of the tablet as a new, third category of devices focused on content consumption. The content play is in there, but focused on print only rather than video and other forms of media, at least for the moment. But given its features and software, and especially the iWork suite, the iPad is actually more like a low end PC-displacement product: The PC reimagined as a portable, touchscreen device. Content delivery is a part of that rethinking. Nine years after Tablet PC, somebody got it right.

The iWork pricing of $9.99 per module is a knife aimed at Office, and a disturbing precedent for all traditional productivity app companies. If you're in one of those companies, you need to rethink your business model quickly.

I'm not saying the PC is dead (not at all), but it looks like Apple is trying to gradually move up from the smartphone space to chew chunks out of the PC market. So maybe the iPad really is a response to PC netbooks, which is what my Apple alumni friends said a year ago. In some ways the iPad is worse than a netbook, in some ways it's better. I will be very interested to see how it sells against netbooks this fall.

I'll have more to say after I've had some time to digest the announcement. In the meantime, your comments are welcome.

I'm reading: Quick take on the Apple iPad: It's a PC, sort of