Atomic Energy

Who remembers AOL Keywords? For that matter, who remembers when AOL actually mattered?

I thought about them this morning. Steve Rubel, on his blog, referenced a googlesystem posting here, that Google is looking to replace URL’s with names in search results. From AOL’s, sorry, I meant Google’s, perspective, that is not surprising. They (a) want their content to be more relevant to real humans, (b) look to optimize (as a commenter on that link indicated), and (c) prefer that the info you get from Google is not necessarily available elsewhere. A URL can be copied, and used elsewhere, whereas a link *must* be clicked, which, as we know, Google uses to improve its search results. It benefits all of us, but Google most of all.

This smells a lot like AOL Keywords, but I am sure Google will come up with a better and cooler name, like, maybe, Google Keywords? Interesting to see how this will play out.

Years ago, my children attended a private Jewish school in New York. As it was a community Jewish school, the school had support programs for children whose parents could not afford the $20k+ tuition.

In a conversation with the school director about the structure of the scholarship program, she explained to me that they distinguish between “cash” problems and “cash flow” problems, or what those of us in the business world would call “income” vs “cash flow.”. For those who, in general, can afford the school, but don’t have cash in hand now, “cash flow” problems, the school would simply arrange a payment schedule (essentially an unofficial loan) on the director’s independent authority. For those with “cash” (i.e. income) issues, a loan obviously won’t help, and they apply for a scholarship.

I was reminded of this conversation by the front page article on Greece’s debt woes in today’s WSJ Europe. Last year, when the EU countries arranged a $160+ BN loan, I was skeptical. After all, Greece didn’t have a cash flow problem – enough income to pay its obligations tomorrow, but not today – it had an income problem – it was spending far more than it had coming in. For that, no amount of loan will help.

Today, they are talking about a “loan exchange”, which is a nicer way of saying restructuring, itself a nicer way to say bankruptcy protection. Unfortunately, though, even this won’t help. Until Greece’s income meets or exceeds its ongoing expenses, a loan, or exchange, or even bankruptcy, is just financial engineering to delay the day of reckoning.

Apparently, Jon Kaplan, the founder of the (sold to Cisco and now shuttered) Flip camera, is going into the grilled cheese business. He is starting a chain of fast grilled cheese sandwich businesses, with $20MM+ from Sequoia to boot.

I have seen a lot of reporters and bloggers surprised, asking what a guy like Kaplan, a tech founder, is doing in the food business, and what Sequoia is doing funding it. I say, all the better.

Tech is by far the most innovative sector of the global (and especially the US) economy. The reason is not just the ability to change rapidly, but the innovative mindset, ability to bring faster returns, and, quite frankly, lighter regulation. In my experience in Israeli business, I have come to the realization that the tech sector succeeded because it grew too quickly for the bureaucratic regulators to crush it, and by the time they wanted to, it was too valuable.

However, the bulk of the economy is not in tech; it is in everyday activities of non-tech sectors. Food, clothing, transportation, travel, manufacturing, furniture, janitorial services, window replacement, etc. etc. Many of these sectors are desperate – and ripe – for innovation of the kind that tech entrepreneurs can bring. Sequoia may be looking at the revenues and market cap of other specialty food chains, but Kaplan, IMHO, is looking at innovation.

Many have bemoaned the loss of jobs to offshoring. Whether the trend is good or bad for local economies and trade is not an issue I want to address here. But, I have no doubt that better innovation in many sectors can bring efficiencies and operations that allow these roles to remain onshore.

Unleash the tech entrepreneurs.

As a follow-on to yesterday’s post, something struck me about Apple’s 10K.

Apple says that it manages its business by geography. Its operating reports reflect it: Americas, Europe, etc. Yet its Retail business – across all geographies – is a separate segment. That makes a lot of sense from a business sense, and is probably a critical reason for its success. However, what is more impressive is that they managed to get it done.

Undoubtedly, Apple’s region managers are powerful people. Any executive, and especially powerful ones like at Apple, are likely to have fought tooth and nail against it. First of all, it dilutes their power. Second, and more importantly, the retail stores are likely to, and probably did, cannibalize the other segments. While the retail stores likely did significantly increase sales, it is unlikely that the $9+BN in retail sales last year did not have some portion of it come out of segments. Put in other words, some of the Retail manager’s bonus came out of the Americas, Europe, etc. managers’ bonuses.

In this scenario, it often is necessary to restructure a comp plan, if not an entire business, to set it up, and even then internal politics starve the new child in its infancy. It is impressive that Apple managed to nurture and grow this one so successfully despite the internal incentives and politics against it.

I had the opportunity to visit Apple’s retail store in Tysons Corner, VA, twice yesterday – unfortunately, it was for repairs, not for fun – and will return again today. I was struck by how busy the store was, and, in general, how Apple has succeeded in its retail stores. Just about every company that tries to get into direct retail from wholesale, or from ecommerce to bricks and mortar, flounders. Surprisingly, Apple appears to have succeeded.

I will be the first to admit that I fully expected Apple to fail at retail, for the above reasons. Yet in 2010, the retail stores had $9.8BN in sales, and $2.4BN in operating profit.

What are the ingredients of Apple’s retail success?

• Cool stores. No better word for it. The stores are well-lit, not crushed, and fun to be in.
• Lots of toys: There are simply tons of computers and electronics around with which to play.
• Open feeling: Although the computers have security, the store does not have visible restrictive security at the door. While it helps keep theft away, it subconsciously deters people from coming in. Your mind goes, “really?” if you need to go past a security guard to get into a Best Buy.
• Tons of associates: They are everywhere.
• Well-trained staff: They know their stuff, and are the first to admit it if they don’t, and then go get the expert.
• Fun names: The guy isn’t the geek or the expert, he is the “Genius” sitting at a “Genius Bar”. It even has bar stools; you almost want to order a drink.
• Happy staff: They are well-paid, among the highest in retail, according to the people I met yesterday. And they can wear practically anything they want, as long as an Apple polo is on top.
• Diverse staff: The age ranges from kids just out of high school to men and women well into their 60s. Every potential customer sees him or herself somewhere in the staff.
• No sales pressure: Staff is paid by the month or by the hour (for part-timer). but not by commission. Associates thus feel comfortably spending lots of time with each person, never pressured to make the next deal.

Apple, in its typical fashion, built a retail experience that violates just about every standard precept of retail, and succeeded in making it a fun place to go, be and buy. The numbers speak loudly.

Square just announced a new app, Card Case, to make payment easier to merchants that you know. Essentially, you keep records of your cards with Square, and then pay participating merchants by sending them payment through your mobile. The merchant, of course, does not have nor need to have a copy of your card. That sounds suspiciously like another “killer app” that was going to “change the world of finance” before being acquired, to wit, PayPal.

PayPal was brilliant. You did not need to trust everyone with your card and payment info, just one trusted merchant.

The way credit cards (and debit cards, to a lesser degree) work, is that you give the merchant enough info that they can claim permission to “pull” a certain amount from your account, whether your bank account (for debit) or credit account (credit cards). The big weakness is that anyone with sufficient information – and you do give that information to a lot of merchants – can impersonate you and take the withdrawals. Protection policies and law in most countries limit your liability, but somewhere down the line you are paying for it, in the stress of worrying about credit theft and in the increased prices that merchants must charge you to cover their increased merchant fees.

A better answer, of course, is for you to have a very few trusted parties, and to “push” funds to merchants when you desire. As a matter of fact, in an anonymous and diffuse market like the Internet, and especially individual seller to individual buyer, such a payment system is a requirement. To some extent, PayPal implemented this model. You trust PayPal, not the merchants, and push funds to whomever you wish.

Then, PayPal was bought by eBay, the dominant but lumbering auction site. In his captivating book, the PayPal Wars, Eric Jackson writes how surprised the PayPal-ers were by the slow movement of eBay on just about everything, once they got into the company.

The mobile payments market should have been PayPal’s to own. They got people and merchants, at least online, to accept the business model of purchasers pushing payment and low risk to both parties. The transition to mobile for bricks-and-mortar merchants should have been theirs. Yet, they squandered it, and opened a door for Jack Dorsey’s Square.

Back in the 90s, a Sun engineer, if I recall correctly, wrote a paper arguing that the true test of a system is how it behaves during failure, not during success. The paper’s primary focus was tech systems, of course. If there is an error, a user-friendly error message is far more useful than the infamous Microsoft Blue Screen if Death (BSOD), filled with unintelligible hex characters.

Last night, I stayed at the Tarrytown House Estate hotel. Upon checkin they offer to have you prepay breakfast, a 40% discount over morning rates. A good deal, I accepted.

In the morning, I went to breakfast, and got there at 905. I discovered that breakfast finishes at 900, and they aggressively clean up at 900 on the spot, with nothing left. Of course, the breakfast coupon clearly states that no refunds will be given for missed breakfast.

The experience left a bitter taste in my mouth, which I mentioned politely half hour later at checkout.

To my surprise, and without being prodded, the desk clerk immediately apologized and refunded the prepay with a smile. I left happy and impressed.

Two lessons:
1) in the service business, as well, customer service is about handling failures much more than successes.
2) Give your customer-facing employees as much leeway as you can, and then some; they will almost always impress your customers.

Well, in addition to big layoffs, it looks like John Chambers is finally getting rid off Linksys and WebEx, in addition to his recent shuttering of Flip. While I disagreed with the closing of Flip – it should have been sold or spun off – I agree with the mindset: Cisco is an enterprise communications products company. For years, Cisco did almost no consulting, allowing it to focus on the best products, and building up a solid partnership network which engendered fierce loyalty from the same consultants. It knew what its core business was and did not get distracted.

Some time in the last decade, Chambers got the “Megalo-CEO” illness, where he decided he had to expand into other areas that may be (at least somewhat) related. So he bought companies that did not fit with the core: WebEx, Linksys (consumer/SOHO products), Flip (pure consumer). Unlike most such CEOs, who feel a desperate urge to expand their empires by big acquisitions (how’s that Compaq deal working out for ya, Carly?), Chambers actually appears to be mature enough to recognize his mistakes and turn them around.

Being CEO is hard; fighting the disease when Wall Street is clamouring for big growth numbers is harder; but being big enough to turn around your own mistakes, that takes real maturity.

Yesterday, Facebook COO Sheryl Sandberg spoke at Barnard’s commencement ceremony. The video of the speech is on Barnard’s Website, and someone transcribed it here. Besides being an interesting speaker and an executive at one of the key tech companies in the world today, I have a particular interest in this speech. I graduated Columbia shortly after Sandberg graduated  One of Sandberg’s key points is that her generation, the one that graduated Harvard, and my wife graduated Barnard shortly thereafter. I always have a warm spot in my heart for Columbia and Barnard.

Sheryl had two very interesting lines: First, that the key moral challenge of the 19th century was slavery, the key challenge of the 20th was totalitarianism (I assume she meant both the Fascist and Communist kinds) and the key challenge of the 21st is oppression of women around the world. I cannot but agree, except to say that it is not only the oppression of women, but the oppression of people. There is no doubt there are many societies where women are oppressed more than men, but in the end, freedom for all as a principle brings freedom to all.

The more interesting business point is that Sandberg says women of her (that means my) generation had succeeded in being educated, yet had failed in equality. She brought statistics showing how women make up >50% of college graduates, but far lower than that in senior educated positions, such as executives, professors, and other roles.

I do not know the macro statistics enough to agree or disagree. I can speak from a micro-economic perspective of individual companies: if you run a business or division or group, no matter how big or small, and especially in the fast-moving and competitive tech space, no one can afford to be stupid enough to pick employees or leaders, and how to relate to them, based on anything other than their merits: their ideas, their execution, and how they work with others. Never hire an idiot over a smart person just because they are a man or woman or Jewish or Muslim or from New England or Texas, and never hire a smart person over an idiot just because of it either. Hire the best you can for the role, ignore the rest.

One of the reasons I have always loved the tech industry is how much, at least internally, the brutal competitive process and scientific nature of the engineering forces that mindset. I know that VCs can be an “old boys’ club,” but overall, Sheryl, macro notwithstanding, our sector offers the best hope for that equality, however defined, and for many people is just the natural way of being. Call it my naivete, I have always viewed the world this way, and have faith the best out there do as well.

Yesterday, Google release pivot tables for Google Apps spreadsheets. Any power user of Excel knows about pivot tables, and has used them for years, if not longer. I have seen a large number of articles in the last day mocking Google’s making a big deal of pivot tables; after all, Excel has had them for so long, there is nothing innovative about them.

I beg to differ. True, there is nothing innovative in the concept, but implementation, especially on a Web scale, is not simple either. Getting pivot tables to work right in a Web app and to be usable by customers without requiring intensive walk-throughs and handholding – most Excel power users remember (if they are honest) the difficulty in getting their head around using it the first time – is not rocket science, but not a trivial exercise either.

Clayton Christensen, in his brilliant “Innovator’s” series of books, argued that to disrupt an existing market and compete with a well-established and entrenched player, all you need is a solution that is “good enough” for a significant minority, but that is easier to use and/or lower cost. While the established player will laugh at the feeble competition attempt due to lower quality and/or features, for many less-demanding users, this solution is good enough at a lower cost. The established player will be happy to be rid of the low-margin customers, who regularly complain that they don’t want to pay more for all of the high-end features anyways. Eventually, the low-end competitor will be able to grow and add features, but at the lower cost, eventually displacing the established player. Rather than taking them head on, the disruptor eats at the foundations.

Google Spreadsheet, for many applications, was good enough. Microsoft and power users can laugh, mock and disparage, but for many users and applications, it simply is good enough. As a result, it takes the lower end, and eventually adds features that move it up-scale. I believe that is precisely what is happening here. Pivot Tables is the first “power feature” to be added. It won’t be the last.