Atomic Energy

Ten years ago, two colleagues and I decided to create a start-up to create electronic academic transcripts. For various reasons, mainly involving the movements of the dominant player in academia IT, we decided not to pursue the venture. In the end, the dominant player did not move in that direction, leaving the market wide open. In the years since, several ventures have pursued this market, notably TranscriptCenter and Scrip-Safe. In the last half year, discussions have renewed as to whether we should venture back into the e-Transcript market. Of course, to succeed at this late stage, we would have to differentiate ourselves from the main players. We decided that the only way to do so is to take a different tack. The existing players are just automating the process. Whereas before a graduate would physically go to his alma mater’s registrar, file a form, get a paper transcript in a sealed envelope and mail it to the new school, now the alumnus goes online to file the request, and the e-Transcript provider would retrieve the transcript and transfer it digitally. Nonetheless, the data is still owned by the old school.

Our perspective was to give ownership to the student upon graduation, creating a Personal Electronic Academic Record (PEAR). When the student graduates, s/he receives, by email, CD or thumb drive, an digital academic record (the PEAR), digitally signed by the institution. When applying to a new institution, the applicant would simply submit (on a Web site or by email) the PEAR s/he received as is. The admissions office could then check the original digital signature on this new venture’s Web site (or that of the original school), validate it, and be done. At first blush, this seems great, as it gives control to the student, not the institution.

On deeper research, though, we realized that it did not make sense. The graduate applies to schools a maximum 4-5 times in their life, and for most once or twice. It is a very rare process. Given the choice between needing to hold on to and keep track of this digitally signed PEAR for the next several decades, or dealing with the fairly low digital pain of asking for a transcript online when it happens, nearly everyone will go for the latter. Carrying this PEAR for years is just not worth it.

This is a classic example of knowing your market. It is easy to come up with good technology ideas, harder (but not that much) for smart people to come up with good market ideas. It is way too easy to get entranced by what technology can do, and buzzwords (such as ownership of data, democratizing information, etc.) that speak to them. In the end, though, the ability to succeed in a venture means the ability to sell, and the ability to sell depends on human behaviour, psychology and sociology. In this case, everything pointed in the right direction, except what real, live people want to do.

We abandoned the venture; let the existing players have it.

Cloud computing is all the rage, and for very good reason. The economics of everything within cloud computing – Software-as-a-Service, Platform-as-a-Service, Infrastructure-as-a-Service, Storage-as-a-Service, basically anything “XaaS” – are just way too compelling to ignore. Unless you are: so big that you cannot gain any more economies of scale, e.g. GE or JPMChase; dealing with such sensitive data that you must host it on your own, e.g. Bank of America or anyone processing credit card transactions; or dealing with such flows of data in-house and on-location that doing it offsite makes no sense, e.g. Merck’s corporate HQ in Whitehouse Station, NJ; then cloud computing makes all the sense in the world.

Of course, every new business model creates new business opportunities. For years, CIOs worried about “vendor lock-in.” If I use an Oracle database, how painful is it for me to move to MySQL or MS-SQL if business dictates I need to? If I use ADP to process payroll, how difficult and expensive will it be for me to migrate to Paychex? Every vendor decision a business makes, and especially one in the IT realm, comes with a certain amount of loss of control. The level of difficulty in and cost of switching vendors to perform the same service or process, is what is known as vendor lock-in.

With the advent of cloud computing, wherein entire chunks of my infrastructure may be running on Google App Engine, Amazon Web Services, SoftLayer or any of dozens of cloud players, CIOs are, justifiably, concerned about vendor lock-in. In order to address this problem, several companies have either expanded their offerings to include or been formed explicitly to offer “cloud virtualization,” and become, in my own words, “cloud abstractors” or “cloud virtualizers.” In short, these companies will become your interface to cloud providers. You contract with them, they will “abstract” out for you  from the cloud providers. You deal with them, they will handle your back-end, whatever your provider. Want to move from Amazon EC2 to SoftLayer? They will do it. Prefer Joyent over SliceHost? They will take care of it. Some even offer to migrate on the fly, in real-time. Essentially, these companies are offering to virtualize the virtual world, adding one more layer of indirection or abstraction. A significant player in this space is RightScale, the cloud management software and service company, who now have a “Cloud Portability” offering.

The question is, will they make it? Will cloud customers move en masse, or at least in large enough scale, to make these offerings viable? I believe that they will not, for two key reasons.

1. Downline Lock-In: Let us say I buy a Cloud Abstractor’s offering so that I am “liberated” from Amazon Web Services. Sure, I am no longer locked into AWS, but now I am tied into that Abstractor. Now, in theory, I could avoid it by dealing with two Abstractors, but then I am doing all the engineering and business work anyways, so I might as well go to the source and deal directly with AWS and one other. Additionally, if I am going to get locked into any one vendor, I certainly would prefer it be a solid, stable, committed company like Amazon than some other smaller player. This is somewhat reminiscent of how load balancers, like those F5 market for tens of thousands of dollars, were first deployed. First, you had one Web server, serving data. All was great, until it crashed, so you put in two of them. That is great, except one is doing all of the work, while the other sits idle, a pretty expensive waste of resource. Along came F5, sold you a load-balancer, and now you have protected yourself from one Web server crashing, and you had both serving data, a pretty good scenario… until the lone F5 load-balancer crashed. Easy to solve, they say, just buy two (very expensive) F5 boxes. So now you have two F5s and two Web servers. All you have really done is push the “vendor lock-in” (or, in the Web server case, point of risk) further down the line. It would be much better to solve it at the source, with your Web servers. None of this is to dump on F5, who have some pretty good products, but rather to point out that sometimes solving a problem with another solution just pushed it down the line. Same thing with Cloud Abstractors and vendor lock-in: if you solve it by pushing it down the line, you have just locked into a different vendor, when you might have been better off at the source.
2. Timing of Expense: In order to avoid vendor lock-in, if it is desired and possible, requires ongoing expense. By contrast, if you want to move and already have vendor lock-in, it requires a much higher one-time conversion expense. Most situations of vendor switch, especially of locked-in products, are likely to occur infrequently, at most once every several years, and in many cases never, since by the time the switch occurs, new technology – infrastructure and applications – are likely to replace the old that was locked into the vendor. Given the infrequent costs and the even greater likelihood of technology refresh by then in any case, very few businesses are likely to invest in an expensive service or product that reduces vendor lock-in in the cloud computing space.
3. Compensation: CIOs are compensated for what they deliver, not what they do not. Vendor lock-in, in a cloud computing situation (or almost any long-term investment), is not a problem for today, but rather one for several years down the line, at best. The CIO will get paid for delivering performance at a good price to his business, enabling the business to grow profitably. Cloud computing gets him/her there; worrying about lock-in just increases today’s costs without bringing any short- or medium-term benefit to the business. Higher expense today to avoid a possible challenge in the future is a recipe for negative IT budgets, and thus works directly against the firm’s – and the CIO’s – direct financial interest.

In summary, I believe most CIOs will complain about vendor lock-in, wish it weren’t so… and then move ahead anyways, for very good reasons.

A few weeks after writing the article on my vision for the future of the mobile carrier industry – let’s call it the “pipification” (as in turning into pipes) of mobile, especially with the advent of 4G in the form of LTE and WiMax, and the subsequent conversion of everything into data, including voice, data, SMS – I came across the October 29, 2010, issue of Forbes magazine. Cover story? “The $10 Phone Bill” by senior reporter Steve Woolley. It is a fascinating piece on the Rise and Fall of the Phone-an Empire (with apologies to Edward Gibbon), in which Linquist and I largely see eye-to-eye. Of course, Linquist is a highly successful founder and CEO of a multi-billion dollar company, in which he has taken his vision forward. Nonetheless, it is interesting to see how much we agree.

The meat and potatoes of the mobile carrier industry – charging for calls and, secondarily, for text messages – is about to start a precipitous decline. Last year US growth in mobile minutes talked was 3% to 2.2 trillion minutes, the slowest growth ever. It is widely expected that 2010 will be the first year of decline. This, combined with competition and political pressure to keep per-minute and plan prices low and reasonable (with “reasonable” defined in odd and political ways), is the main reason that so many carriers are pushing subsidized expensive phones, including smartphones, with multi-year commitments. The money they make on data, and especially the margins, can often exceed what they make on basic voice. But this is just delaying the inevitable. MetroPCS and similar companies, including new players like the one for which I advocate in my earlier article, will eventually commoditize mobile service, with each company selling access to digital pipes, and competing on bandwidth, latency, availability (bits per cubic meter, as Linquist discusses in the Forbes article), and of course, customer service… an area where mobile carriers are not generally highly regarded (understatement here).

For the executives at AT&T Wireless, Verizon, Vodafone, Orange and the rest, this is pretty bleak; for those of us who use the service – i.e. everyone – and the entrepreneurs and executives smart enough to drive the trend rather than be driven by it, like Roger Linquist, this is a very rosy future indeed.

White Goods are normally defined as those basic bland appliances we use around our house, usually the large ones: fridge, washer, dryer, dishwasher, oven/stove. This is a fairly staid market, and has been for many years. Whatever little innovation there is normally comes in terms of features added on. Thus, there may be a new “high-value” GE or Amana line, which may include digital temperature controls instead of a knob, or stainless steel instead of white exterior. All in all, though, this is a low-innovation market, signaled by the intense consolidation in the market over the last decade or two. Nowadays, when you buy a GE or Amana or any brand, it is likely made by only one of two companies, with a label slapped on it. This type of consolidation and outsourcing only occurs when there is little innovation and differentiation.

The one exception to this has been in cleaning products, where Dyson and iRobot have really created innovative products. Dyson’s vacuum cleaners are vastly more efficient than a typical Hoover, and do not lose power as time goes on. Further, Dyson created it using basic mechanics, physics that has been around for a very long time, not some new innovation in optics, chip design or software. iRobot, on the other hand, uses modern technologies to remove the bulk of cleaning effort from the hands of individuals in the first place. Dyson makes cleaning more effective; iRobot makes cleaning less labor-intensive.

There is one area that (despite Whirlpool’s protestations to the contrary) has had nearly zero innovation in a very long time, but should be subject to a very simple form: clothes washers and dryers. Sure, there are models that are more energy-efficient, more water-efficient, use electronic cycles, but in the end, clothes washing (agitated or tumble) and drying (tumble or “baking” in the European style), is essentially done the same way it has been for decades. The veritable trusted name-brand in washers and dryers, Maytag, was acquired by Whirlpool for $2.7BN back in 2005.

I believe that clothes dryers are a simple area to innovate, and are a classic case study in learning from your market. The average clothes wash cycle time for a top-loader or high-speed front-loader washer, American-sized 10kg machine, is 25 minutes. The average dry time for a similar full dryer is 60 minutes. If you watch anyone doing washes, you will see that they load the wash, when it is finished they load the dryer and another load in the wash. The wash finishes after 25 minutes, and the clothing sits there for another 35 minutes, waiting for the dryer to finish. Yesterday, for the first time, I saw someone who put two dryers in his house to avoid exactly this problem. Those of us in the operations business look at the model and instantly recognize that the dryer is the bottleneck in the process. While my colleague of yesterday had a workable, if expensive, solution, and I am sure Whirlpool appreciates his throwing an extra $1,000 their way, this is hardly the right way to go about doing it. Interestingly, the latest front-load high-efficiency washers on a normal cycle take closer to 45 minutes. While this may be necessary to save water, I am not wholly convinced it is not at least partially a ploy to distract those doing loads of the lack of innovation (and slow time) of dryers.

I believe that there is room for innovation if someone could invent and patent a dryer that efficiently and effectively dried a full load of clothes in the same 25 minute cycle, or at least close, they would quickly take a commanding position in the market or, alternatively, be able to quickly sell to a large existing player.

Wireless carriers are the company everyone loves to hate. No one denies that they bring an invaluable service. However, their legendarily awful customer service; lock-ins and contracts; early termination fees; obtuse bills; and obscene roaming charges force us all to wish there was a better way.

I believe that current trends will create new forms of wireless carriers that are likely to spell the death of the old ones, unless they find the ability to innovate and cannibalize their own market. Of course, their track record is not exactly enticing.

• Short-term: In the short-term, there is room for a carrier that will provide global free roaming, unlimited data, no contracts (= no subsidized phones), and excellent customer service. A company like this will have to draw its executives from the Internet sector, one where change is a given and customer service is a right, not a privilege granted by the company. This carrier will operate as Virtual Mobile Network Operator (VMNO), lease bandwidth in multiple countries (initially US and UK), will sell plans at a price that is below current standard plans but without the phone subsidy, and thus no commitment. Customers will be able to purchase a direct in-dial phone number in any country where the carrier operates (or even those where it does not), all of which will ring the mobile phone wherever the customer is. When the customer dials out, it will show the local number as caller ID. All calls will be local. If the customer dials a UK number, it deducts minutes from his/her 1,200 minute plan, but not long-distance charges; if the customer lives in the US but is in the UK, each minute is deducted from his/her 1,200 minute plan, but no roaming charges. With current VoIP technology and the ability to buy tower capacity as a VMNO in multiple countries, this carrier is viable right now. It will need to market directly to mobile (pun intended) traveling customers, such as executives, pilots, and consultants, and will need to price out correctly. Nonetheless, with sufficient capital, this is achievable at this very moment. The primary challenges are: sufficient capital to form the company; successfully leasing tower capacity from companies whose business model you are trying to disrupt; and a large enough initial market to sustain the company through growth.
• Long-term: In the long-term, 4G is coming. Whether LTE or WiMax, within a few years all mobile services in modern developed countries will be 4G. In the 4G world, voice and data are not 2 distinct mobile services; voice will only be VoIP, running over 4G data. In that world, your voice carrier could be your mobile carrier, or it might be Vonage, Skype, or some other, new mobile VoIP company. If you get off the plan at Heathrow, London, your voice is not roaming; it is just connected to the Internet and giving you voice. In many ways, this simplifies matters. Given the mindset of wireless carriers, it is to be expected that they will block all VoIP except those that they sell, at contracts, lock-in and premium. Again, we can expect data roaming charges to more than offset any lost voice roaming. However, for our mobile carrier disruptor, this world is even easier. Our upstart disruptor can focus solely on leasing data bandwidth, and leave it open to the Internet. Because it is data, much of the cost of roaming disappears. No longer does a call need to route through the local carrier, back to the home country, and then back again. As soon as you are online locally, you are online globally.

If someone could raise sufficient capital (several million dollars just as seed), hire the right executives, customer service people (love to see the ones from Tony Hsieh’s Zappos), engineers and dealmakers, this could start right now.

Undoubtedly, the hottest – and most critically analyzed – announcement of the last week has been Apple’s release of the iPad. I will take a slightly different perspective on it, looking at it from the perspective of the iPod. We will do this from two angles: marketing and long-term strategy

First, from the marketing perspective, I believe this device’s name is awful. Jokes abound on the Internet within a day of the release – and having spent almost a decade on Wall Street, I suspect it took less time than the fastest trade-processing system for the jokes to hit the trading floors – about whether it is an Internet device or a 21st century sanitary napkin. Apple has been very successful with its iMac, hugely successful with its iPod, and beyond all expectations with its iPhone. However, there is a concept of brand overuse, and there are appropriate extensions and inappropriate ones. Anyone with half life experience should have seen the associations coming; this is especially true for a master of marketing like Steve Jobs. It was always hip to walk around with an iPod – “oh, cool iPod” – and an iPhone, but most people tend to keep discussions of their bodily functions outside of the hip and cool space. “Is that an iPad?” “(blush) Oh, no, just a tablet computer” is not a good sequence for generating demand. Microsoft ran afoul of this in a minor sense with its Zune. Zune sounds very close to the Israeli Hebrew slang word for intercourse. The irony is that an enormous percentage of Microsoft’s R&D is performed in the major Microsoft R&D Center in Herzliya Pituach, Israel. This should have raised a red flag. Nonetheless, Microsoft either didn’t notice, or decided that a 7MM person market is not worth the trouble of changing the name. In any case, Zune has hardly been a smashing success, for reasons that make its crude-sounding name a minor element.

In the issues of larger long-term strategy, I believe Apple may be suffering from a mixture of envy, technical limitations and confusion.

1. Envy: Apple owns and dominates the digital music market. By selling an MP3 player that was easy to use, hip and cool, Apple placed itself precisely where it needed to be to become the prime retailer of music, upending the decades-old music distribution system. For all that Amazon and Wal-Mart have done in this space, as well as other minor players, Apple deserves full credit for finding the way to disrupt the music market using the Internet; kudos to Steve & Co. However, in the book market, an existing retailer, Amazon.com, managed to successfully sell an eReader with an attached store, essentially grabbing a page straight out of Apple’s playbook. Further, with Amazon’s existing relationships with publishers, they became the perfect channel for it. Amazon is no technical upstart in the book distribution business; they are a dominant player in the business, and they moved into digital distribution by using Apple’s model. I believe Steve Jobs saw Jeff Bezos do this and went green with envy.
2. Technical Limitations: The Kindle is limited in many ways: it cannot do video, general documents, really surf the Web, work in many other countries, etc. However, at buying and reading books, the Kindle is superb. In the old Unix systems administration world, the software design philosophy was to do one thing, and do it extremely well. In that respect, the Kindle follows this philosophy. Buying books is easy; battery life with wireless on is now up to a week; the pages are crisp and clear, thanks to eInk technology. The iPad, on the other hand, uses colour and audio, with multiple wireless connections, which makes for a great multimedia environment, but tires the eyes and has a limited battery life of 10 hours. Granted, this is much better than most laptops or even the iPhone, but it is pathetic for long-term use. Most people are willing to curl up with a good book or two on the beach for days, but to have to go charge it? Definitely not.
3. Confusion: Apple seems to recognize its limitations, and thus seems to position the device midway between a reading revolution and a laptop revolution. In politics, this is called triangulation; in marketing, we call it confusion. If you go to Apple’s iPad page, the title is “the best way to experience the web, email and photos.”

With all of that, there is no question that the iPad (I cannot even write the name without wondering if StayFree is going to sue them or partner with them) is a very cool device. However, Apple has gotten quite confused and possibly envious. After a great run of iMac, MacBook, iPod and iPhone, I am concerned they are about to flop.