Perhaps it is because I am a regular world-traveler. I am a citizen of three countries – US, Canada, Israel – regularly visit all there, and often others as well. As such, I am more acutely aware of the limits of performance (and lack thereof) of the many carriers.

Perhaps it is simply the engineer+businessman in me who loves cracking a tough nut. The mobile industry is very much a tough nut, from both technology and business perspectives.

I have written about carriers’ roaming squeeze before; only recently I looked at their text messaging and how Apple is possibly after it. Today, I am interested in mobile Internet.

Most people who never travel do not know it, but your mobile device is very different than your laptop or other WiFi device. Your WiFi device connects to a WiFi access points, requests and receives an IP address, a short series of four numbers from 1 to 255, that allows it to then connect to the Internet. Mobile data, especially of the most popular GSM kind, has a slightly different structure. When your mobile phone wants to connect over the 3G network to get data, it first sends key information called an Access Point Name, or APN, to the mobile carrier. The carrier then uses that APN, along with the IMEI or unique identifier of your mobile device, to determine what, if any, access to give.

Each carrier may have multiple APNs, each with a different purpose. For example, one APN may give access to the whole Internet, another to a narrower carrier-only content area, and another to a corporate Intranet. In many ways, this is like the old days of telecommuting. In the early-to-mid-90s, before there was a broadly used and accepted Internet, before CheckPoint and commercial firewalls, and long before VPNs, critical workers who had to telecommute had multiple phone lines. For example, I had three lines in my home: one was for personal use, one was for business use (with a separate number and calling plan), and one was a specialized data line (called ISDN) that connected directly to my office network. Nowadays, of course, no one does this. Everyone has their personal home line (if that), and their Internet connection. Their employer may pay for part or all of the Internet. But on your laptop, you have a VPN connection to securely connect to the office.

Carrier APNs, from a functionality perspective, are a very dated and rigid legacy. Essentially, everyone needs to connect to the Internet. If they then need to connect to an office, they don’t need an APN; they just launch the VPN app on the iPhone or Android. If the carrier does not want to give the user access to the broader Internet, e.g. a child’s mobile device with a family filter, the carrier can check each request against its subscriber database and determine whether to allow or block.

If so, why do APNs still exist? Why not just have each carrier allow direct Internet access, and filter at the connection between carrier and Internet? In a word: money. And in that lies the opportunity for disruption, no different than in roaming.

Look at the AT&T PayGo prepaid plans:

http://www.wireless.att.com/cell-phone-service/cell-phone-plans/pyg-cell-phone-plans.jsp?wtSlotClick=1-007FTV-0-1&WT.svl=title

Notice that if you are on some plans, you get data access; others you need to buy it; others, you need to buy it if you use a smartphone but it is included in a featurephone. And if you have an iPhone, none of these will work, unless you go to http://unlockit.co.nz and change the APN.

From AT&T’s perspective, it is all the same: 50MB of data is 50MB of data, no matter from whence it comes. But AT&T is trying to shepherd higher-end consumers into their higher-cost, higher-profit post-paid plans. Using APNs, an outdated technology, is one way to do so.

The opportunity – begun to be seized by StraightTalk – is to have a simple carrier that allows access from any device, at a reasonable pre-paid or post-paid price.

First, Apple is now an iPhone company. I love my iPad and my MacBook Air, but the bulk of Apple’s revenues and profits now come from iPhones. Apple has to find significant additional sources of revenue to continue to grow that business.

Second, the carriers are difficult. Despite mobile being a relatively new industry, the carriers are classical old-school, hidebound, squeeze out every dollar, mistreat the customer, industry types. Apple has to find a way to keep the carrier subsidies flowing, while managing a love/hate relationship with them. Add the fact that each country has its own carriers, and even connections do not help – T-Mobile US is distinct from T-Mobile Germany, despite the common parentage and brand – and Apple has a challenge in growing the business at its historical clip.

Third, Apple is acutely aware that if there is one part of the iPhone and iPad experience that is negative, it is the carriers. I can buy everything about my iPhone experience from Apple – and it is a pretty good experience – except for connectivity. Apple has definitely improved it, especially for the iPad where, at least in some countries, I can turn on and off data from within the iPad itself, but that is limited.

Fourth, Apple is aware that the world is becoming more global, and people cross borders more often, especially iPhone users. Swapping out SIM cards, dealing with roaming fees, giving out multiple numbers, these are all signs of a hidebound industry that damages the iPhone experience. Granted, the experience is just as bad as with any other phone, smart or feature, but it is still a bad experience.

Fifth, Apple has taken steps to upend the carriers cash sources. iMessage already cuts into SMS, from what I hear significantly, and makes the experience seamless. I can take out my AT&T US SIM, pop in an Orange Israel one, and iMessage just works, Apple-style. Next Apple added FaceTime. It only works over WiFi (for now), and requires video (for now), but adding 3G and audio-only would add an additional significant cut into carriers’ minutes-based revenue.

Sixth, Apple sees companies like Free Mobile in France giving out low-cost plans without subsidies and succeeding. In order to cut them off at the pass, someone would have to offer a similar plan globally, but available only on Apple devices. Most read the Free Mobile story as a threat to Apple: without subsidies, the iPhone is too expensive, and so Apple loses. I see it as a threat. If customers could get a low-cost plan and an Apple experience, they would go for it. Apple will have to give up some iPhone margin, but will lock customers into Apple Wireless.

I see Apple starting a global mobile firm. It probably start as an MVNO and eventually become a full-fledged operator. It will probably offer two types of plans: high-cost monthly commitment with low-cost iPhone, or low-cost monthly no-commitment with full-price iPhone paid upfront. It will probably have a fairly reasonable data cap, with iMessages and FaceTime (and its audio-only equivalent MouthTime?) not counting towards the data cap. Finally, it will likely have no roaming fees, especially for Apple services such as iMessages and FaceTime.

Time will tell…

This is actually one of the key reasons behind golden parachutes. Boards want their executives managing the business for the best interests of the shareholder. A CEO or COO or CMO fairly well knows that his/her company, if it is acquired, will dispose of the existing executive in favour of the one already in place at the acquirer. This, in turn, drives the executive to be biased against an acquisition, and thus structure to prevent it, even subconsciously. The golden parachute frees the executive from the concern about post-acquisition by providing him/her with a parachute to land safely from being acquired.

Personally, I was at Scudder Investments when Deutsche Bank acquired them from Zurich Global, and the balance of power was very clear. I have seen the same many times over, as friends, colleagues and clients have either acquired or been acquired. Earlier this week, I met the COO of a consulting firm who started at an acquired firm. The larger consulting house had purchased his firm in order to expand its geographical presence. In most normal circumstances, the executive would have some form of 12-to-24-month incentive package to help transition, but then leave or be eased out. Contrary to expectations, the gentleman succeeded very well in the acquirer, rapidly becoming the COO.

I asked him how he had broken the pattern. His answer was interesting and illuminating, although it is unlikely to work everywhere:

• Deliver and wait: A little patience goes a long way. Acquisitions are a time of disruption. An executive who is patient, learns the ins and outs of the new firm, and is able to deliver above-average returns in the midst of turmoil will stand out.
• Results matter: In this respect, as in an ongoing concern, results matter. The manager who delivers positive results is more likely to be promoted, whichever firm he comes from.
• Culture matters: Clearly, the acquiring firm had a culture that eschewed “us vs them”, i.e. belittling the acquirees.

And, of course, it didn’t hurt that the executive here was smart as a whip.

This will not work everywhere. Culture is probably the biggest factor. However, when it works, everyone wins, especially the shareholders. I suspect this may also work better in a privately held firm, where interest in the long-term financial benefits, i.e. the shareholders, is closest to the managers. In publicly held firms, where the organizations are larger, and the agency problem is more of an issue, power games and negative cultures are more likely to play a prominent role.

When I first started at Morgan Stanley IT in the mid-90s, every evening, on the 16th floor (where the Managing Directors and CIO lived), 80+% of the lights were on after 7pm. By the time I left, four years later, I would say 80% were off by 6pm. People were just as dedicated, and delivered at least as much value, if not more. But people learned that not everything had to be done, not everything had to be done today, and not everything had to be done at the office. As great a company as it was, we learned to value and implement a culture of deliverables over face time.

Silicon Valley, for the most part, never learned that. Everything was last minute, everything was impossible deadlines, and everything had to be done in-person.

It looks like that, finally, is changing. One of the most powerful people in SV, and likely the second most powerful woman (after Meg Whitman), is “coming out of the closet.” Facebook COO Sheryl Sandberg leaves the office every day by 5:30pm to have dinner with her kids. Every day. The interview on mashable is here. She is on email later in the evening, and early in the morning, so that she can balance time with her kids with staying on top of and managing the activities at Facebook. What is interesting is not that she does it, nor for how long she has been doing it, but that only now is she self-confident enough to publicly speak about it. I know the feeling.

Hats off to this Barnard College (my wife’s alma mater, and part of Columbia University, my own alma mater) alumna for taking a public step towards showing that you can get all that work done, that deliverables matter and face time does not, and that family is the reason we do all of this.

The gist? Non-technical founders will always make “subpar products that fail slowly.” The main thrust of the argument is that non-technical founders have vision, and in translating that vision to the implementors, well, something gets “lost in translation.”

I am an engineer at heart. I consult nowadays, most of the time on technology and business operations, oftentimes also on product strategy. I have an MBA from Duke University’s Fuqua School of Business, and am highly conversant in product strategy, But at heart I am engineer. Nothing makes me as happy as building something that works. So, I still build with Lego; I learn whatever the latest infrastructure and software platforms are out there; I contribute to the open-source community whenever I can (https://github.com/deitch for the curious).

Not surprisingly, this engineer has a bias towards an article that says that techies are better at the startup business. But I think Alyson Shontell has a point here, beyond the “lost in translation” problem.

Techies, engineers in general, are people of building new products. They love it, live it, breathe it. And they don’t stop with software or hardware. They want to reengineer everything to be newer and better. Technical people have a great weakness, their blind spot as to how real people will use (or not use) and pay for (or not pay for) their products. But they will always envision new products and services, and ways the world could just be a better place.

Conversely, when I meet a startup founded by marketers or salespeople who have no technology experience, I can almost put the words in their mouths. I *know* they will soon say, “we can just hire the technical talent.” I run far away from those, as fast as I can… and I run regularly.

Every one of the great companies, almost without exception (Jeff Bezos is raised in the comments, but I don’t know if he knew how to code in his DE Shaw days), was founded by a technologist: Bill Gates of Microsoft; Jobs (yes, he even built circuit boards) & Wozniak of Apple; Page and Brin of Google; the list goes on.

I admit my bias, but that doesn’t change the reality. If you want success, make sure technologists are founders, or at the very least equal co-founders.

“During the last five years, APIs have begun to be recognized as one of a company’s most enduring assets.”

API – Application Programming Interface – is the well-defined methods and interfaces that enable other developers and engineers, i.e. those not working for you, to utilize your services. You create leverage. You may be a small company with 2 engineers, a mid-size with 100, or a large one with thousands. Nonetheless, you are still limited. Outside, in the real world, there are millions of engineers and developers, each working for themselves or their company, each of which has its own interests. They will find ways to use your service, ways you never thought of, nor would you ever think of, by yourself.

Many companies are afraid to open APIs. They want control, and are concerned that others out there may affect their brand by using their API. They are afraid to open their coat and expose themselves to the world.

The Forbes article is highlighting that which many of us who have lived in and out of the technology world for a long time have always instinctively known: leveraging the outside world, which is so much larger than you are, will help grow your business, and they will stay with you for a long long time. Numerous studies have shown that Microsoft stole the PC market from under Apple because they did a better job cultivating developers – they leveraged their API. There is little question that a key, if not the key, asset in the runaway success of the iPhone and iPad has been the App Store. The iTunes App Store is nothing more or less than the API model: let millions of outside developers build products (apps) that use your platform (iPhone) using the API.

It may feel strange to many, but an open API is an unquestionable win. Open Your Coat!

1. What should and should not be covered by insurance?
2. How do you defuse a situation that appears to be intractable?

What Should Be Covered by Insurance?

Insurance was originally conceived to cover low-risk low-tolerance events. For example, the overwhelming majority of people do not get into total-loss car accidents. Yet, with a car costing tens of thousands of dollars, most people cannot afford having their car totalled. If the probability of a total loss is 1% per year, and the cost of replacement is $20,000, then one of every 100 people, each year, will lose $20,000 on their car. If those 100 people each puts $200 into a pool, then the total amount in the pool is $20,000, exactly enough to cover the losses. For these people, paying $200 each year to make sure that a total loss will be covered in full makes sense.

In reality there is some administrative overhead, and we have to pay actuaries to figure out if the risk is 1% or 0.1% or 10%, and if it matters if you are a smoker or not, or if you live in Manhattan (lots of accidents) or rural Kansas (very few), so that your cost might be much lower. Let’s say the overhead is 25%, so, it is more than likely it will cost you $250, but still a really good deal.

On the other hand, if the cost of a tune-up is $100 each year, and you will get a tune-up every year, it doesn’t make much sense to insure it. Since everyone will have to file a $100 claim, everyone will also have to put in at least an extra $100. Using our previous example of a 25% overhead uplift, you will pay $125 in insurance premiums to cover $100 in costs. Most people would rather just pay $100 out of pocket than $125 in premiums. A tune-up is a high-risk high-tolerance event: it will happen to just about everyone, and just about everyone can handle the price out of pocket.

This is not some new analysis; this is the very basic structure and purpose of insurance. Insurance works extremely well for low-risk low-tolerance events, and extremely poorly for high-risk high-tolerance events.

Contraception is a high-risk high-tolerance event: the majority of people will purchase it, and nearly everyone who will use it can afford it. As the Georgetown Law student correctly pointed out, it may be expensive, but putting it in insurance does not make it less expensive; it actually makes it more expensive. On drugstore.com, a one-month supply of a name-brand pill cost $56; but getting it covered by insurance will likely cost $70-80 in premiums. Even if she convinces the school to cover it, she either will see an increase in her health-care premium, or in her tuition… and that increase will be more than the cost of the item itself, if only due to administrative overhead.

From the pure self interest of the individual, contraception is better off not being covered. Someone has to pay for it, and that someone, in the end, is always the individual – through lower salary, higher tuition, higher premium or higher taxes – and for a high-risk high-tolerance purchase such as contraceptives, the individual will pay more.

How to Defuse the Intractable Situation

Women’s issues focused organizations and individuals want contraception covered by the employer, and their desire to cover such items is understandable. Liberty focused organizations and individuals want contraception to be a matter of employer choice, and their desire and  constitutional right to choose how to spend their funds also are understandable. How is it possible to square the circle, and have both parties walk away feeling their perceived rights are respected?

At heart, the friction point is created by having a third party, with its own desires and morals, in the middle: the employer. If the employer were not involved in the coverage and decisions of the individual, the issue would instantly defuse. No one objects if an individual, using his or her own funds, spends $56 at drugstore.com to buy a month of contraceptives. Even Georgetown does not care if the funds were earned by working for Georgetown, or, for that matter, by working as a direct aide to Edward Cardinal Egan. Conversely, no one cares much if someone chooses not to spend their funds on contraceptives, whether the funds were earned by working for the Cardinal, or by filling potholes for the District of Columbia.

The entire situation is created because the employer directly spends its own funds purchasing health coverage. If the employer were to pay the individual, and the individual were to purchase contraceptives, or pay for insurance, or pay for insurance that covered contraceptives, or pay for insurance that on principle did not cover contraceptives, it would be irrelevant to the employer, and hence to society at large.

The fundamental issue, then, is the injection of the employer between individual and health-care provider / insurer. The solution, then, which would satisfy both the individual and the employer, is to remove the employer from the picture.

As an aside, I suspect that most politicians would be disappointed with that outcome, but my interest is the good of the employers and individuals, and economy and society as a whole, not the politicians.

The article led to my thinking about all investments, and whether real estate, in this respect, is unique. In thinking more deeply, I begin to wonder how any asset class can possibly have a long-term return on investment that is higher than the growth of the economy in general, other than (possibly) equities.

Here is my logic. Let us say that at one point in time, the entire stock of an asset class (e.g. real estate) is worth $1TN. Thus, the people of an economy have poured one trillion dollars into real estate. Over the next decade, the economy grows by 3% a year on average, while the stock of real estate – market value – doubles to $2TN. With a 3% average annual growth rate, compounded over 10 years, the economy has grown by 34.4% (3% annually compounded 10 times). If real estate is part of the economy, then the “natural” (relative to the economy) value of real estate should have grown to $1.34TN. The remaining $640BN must have come from somewhere else; some other asset class, or set of asset classes, must have grown, together, $640BN less than 34.4%. This should lead to arbitrage, although that is somewhat harder to do with fixed assets like real estate, and people in general seeing other assets undervalued. Over a long enough period of time, the ability of real estate to pull from, say, precious metals, should be counterbalanced by precious metals pulling from real estate. In other words, over a long enough run, real estate, and all other asset classes, should grow at no more or less than the rate of the economy, 3% per year in our example.

The more I think about it, though, the more I realize that there is only one asset class that, again over the long run, is truly an asset: equities. All other so-called assets are just stores of value. Gold, FCOJ (Trading Places?), real estate: not one single asset actually creates new value, with the exception of equities, which are investments in companies that exist to create a profit, i.e. to take $5 of inputs, create $6 of outputs, and thus create profits and new growth.

Over the very long run, smoothing out localized bubbles, it makes little sense that all of these asset classes other than equities should grow at anything beyond the rate of inflation. Quite simply, $1TN of real estate today is really worth no more than $1TN in ten years, but defined in today’s dollars, i.e. $1TN plus the rate of inflation. Every other asset class should be the same, except for equities, which are the source of all growth in GDP beyond the rate of inflation. Equities should grow at the rate of GDP growth, all other asset classes should grow at the rate of inflation.

For those not following, Apple claims it bought the worldwide rights to the trademarked term “iPad” several years ago, but Proview claims it did not, at least in China. On that basis, Chinese officials have been seizing iPads from retail outlets in China. Further, as the above article states, Proview is now trying to get Chinese officials to block all exports of iPads. Since iPads are all manufactured in China, and Apple keeps very small inventory, this could directly shut down all iPad deliveries and have a very negative impact on Apple.

It shouldn’t surprise anyone that the Chinese government is acting in cahoots with its local companies. Many statist countries work this way – think France and airbus, Japan and the heavy industries, etc. What is surprising is the willingness to use the “nuclear option” so quickly. There is no question that this is out and out blackmail; a Chinese company is using the Chinese government to threaten the core business line of a major international technology company. Essentially, the Chinese are saying, “you need us, we own you. Without us, you are nothing, so pay the protection money, or we will strangle you.” It reminds me of the scene in Tom Clancy’s bestseller, “The Bear and the Dragon,” wherein the Politburo ministers are convinced no clothing manufacturers will ever pull out of China, since, “they need us! No one would dare leave the Middle Kingdom!”

The incident reminds me of a story with Air Canada and Tel Aviv Ben Gurion Airport in Israel back in 2000. As the Internet was booming, and Israeli startups were multiplying, Air Canada did not have enough capacity with its once-daily Toronto-Tel Aviv flights, and so wanted to add a second flight. Needless to say, Israeli carrier El Al, in bed with the airport authorities, realized the need, and decided it wanted the extra landing and gate slots. So it used the airport authorities to deny Air Canada the extra slots due to “lack of space,” to try and force customers onto El Al planes. After all, “you need us!”

Air Canada didn’t miss a beat. It went to Transport Canada, who promptly informed El Al that they were terribly sorry, but they may not have enough airspace for the El Al overflights from Tel Aviv to Los Angeles and New York – El Al’s number one market – and so they could no longer fly. Needless to say, El Al (and Israel Airport Authority) quickly relented.

The moral of the story: as they say in business, no one is irreplaceable.

Yes, in the short run, Apple absolutely needs China to get its production out to customers. It will pay up the “protection money,” whether $1MM or $1BN. But they will take the lessons to heart, and never leave themselves captive to capricious, non-rule-of-law countries again. Expect Apple to invest seriously (and convince its Japanese and Taiwanese and American partners to do the same) in diversifying its manufacturing out of China. And where Apple moves, others will follow. China has no natural, built-in, cultural or other right to own manufacturing of anything, from clothing to iPads. People go there because it makes business sense. And when it doesn’t, they will leave.

In many ways, I can appreciate his perspective. Many companies have been killed by naive MBAs who think the formulae and theories they learned in business school can “save” any company, in fact all companies are just waiting to be so saved. At the same time, even when they do have value to add, they haven’t learned how to communicate with the critical producers in the company.

For those very reasons, I have always preferred MBAs with strong operating experience

before

going to B school, and schools that emphasize those with experience in their program along with a tight focus on what works in the real world and how to communicate with real people. That is one of the key reasons I went to Duke’s GEMBA program, where the minimum experience was a decade.

I believe Kornbluth’s discredit of MBAs on principle is wrong, for the very reasons that he unwittingly makes aware in the article. AOL definitely underemphasized community, a serious management mistake. But AOL also made three major mistakes, ones that creative content types would also have made, but experienced creative business types might have found.

1. Intense focus on dial up, completely missing broadband.
2. Short term revenue focus, confident that customers would continue to pay $23.95 per month for their service, when alternate revenue models were becoming available, notably the Google model of free supported by advertising, exactly the Facebook model.
3. Control. AOL loved their walled garden, but the Internet is much wider than that. People didn’t want to be walled in.

Business fail because they kill their creative people, creative edge, but also because they miss the creative business foresight to pivot with changes in the market.