Atomic Energy

Today, IDG posted an article that Steve Jobs was looking at using unlicensed WiFi spectrum to create a direct competitor to mobile carriers. Although the effort failed, many viewed this as another proof that Jobs, as always, needed to control the entire experience.

My take is somewhat different. Mobile phones have only really been around for 20+ years, and digital mobile telephony and mobile data for far less than that. Yet, the large carriers are second only to cable companies in the bottom of the rankings for customer satisfaction, and apparently even Steve Job was thinking about how to disrupt them.

There is no question that they are ripe for disruption. Their pricing is sometimes high, but not absurdly so, except in overage charges and roaming. But their customer interaction is begging to put them out of business. I am sorry that Jobs could not get it done, but it is only a matter of time until someone finds a way to do it without the technical hurdles and massive capital currently required.

Back in 2004-2005, while doing my MBA at Duke’s Fuqua School of Business – which was an excellent experience at a great school – I had the pleasure of studying marketing under Preyas Desai.

A few days ago, Duke, together with Rice University, published press releases announcing research by the same Preyas Desai and his colleague Dinah Vernik at Rice. Their conclusion, which is counter-intuitive to the record labels but, ironically, makes perfect sense to many of us, is that removing DRM may actually reduce piracy. The press releases are at Rice and Duke. Additionally, the full article will be published in the November-December 2011 issue of Informs.

According to the press releases, looking solely at whether or not people can copy music they download is too narrow a view. One needs to look at the entire set of channels by which people can obtain (or choose not to obtain) music – CDs, legal DRM downloads, legal DRM-free downloads, and piracy. The impact of DRM on the consumer and his/her purchasing decisions across all channels need to be considered when understanding the impact of piracy.

While I have no doubt the authors’ science will be precise, mathematical, and far more detailed than I could do, I believe their key insights work at a more fundamental, business level. For the overwhelming majority of consumers, two key facts, psychological facts, hold true:

1. They are perfectly happy to pay for something and obtain it legally, if the price is reasonable and the alternative is clearly illegal.
2. They are unlikely to share music, i.e. pirate it, for others to benefit for free when they themselves paid for it.

In other words, given the opportunity to obtain something in a legitimate fashion, they will do so and *not* pirate it.

If so, why do people pirate? There are a few key reasons:

1. DRM: If I pay to download a file, but then cannot use it among my various devices, I am likely to strip the DRM if I am technically savvy, or just download it from a pirated site if I am not. DRM helps create the demand for pirated goods, which in turn increases the number of suppliers.
2. Availability: If I cannot obtain what I want legally with ease, I am likely to get it illegally. This is as true for drug users as it is for music aficionados. I personally believe that the staggered release dates of DVDs worldwide lead directly to increased movie piracy. iTunes’ global availability and the simultaneous DVD release dates have reduced the demand for piracy.
3. Bundling: As long as an album that contains two songs that I want out of ten is only available as an album, I have a stronger incentive to download it illegally. Quite simply, a $10 album (which none is anymore, of course) for two good songs is $5/song. If I could get each of them for $1-1.25, I would probably happily do so. But if I cannot, I have a strong incentive to find the two I want online.

At heart, though, I think the strongest indicator is the infamous lawsuits launched a few years back by the RIAA. Suing grandmothers or teenagers for listening to copied music may be bad law and bad for business, but it is a strong indicator of the music industry mindset, which is only beginning to change. Few people would actually pirate if the above three incentives were removed. But those same incentives are profit maximizers for the industry… at the expense of the consumers. Consumers may want what they want, but to music industry executives, these desires were and are threatening to a way of life and business, and thus began to view consumers as “the enemy.” Anytime a business or industry sees its source of revenue as the enemy, it is a very bad sign.

Ironically, removing those three could improve the industry’s fortunes, possibly exceeding where it was before:

1. Removal of DRM, which means I can share across my devices and back up safely, gives me greater incentive to purchase with comfort, leading to more purchases. Further, sharing my music with my wife and children in the house means others are introduced to a particular artist or style they otherwise would not have heard, and are likely to increase purchases.
2. Availability is fairly straightforward. If I can buy it, I will.
3. Bundling is the most insidious. Quite simply, forcing consumers to buy albums is partially to manage production costs, which are cheaper in bulk, partially to manage channel costs and profits, and partially (probably mostly) to create artificial subsidies for albums that only have a few good tracks. Yet, if I can buy the tracks I want, I will buy those at a higher price. Sure, plenty of people bought an album for just two tracks, but many more chose not to, a type of deadweight loss. This entire underserved market can now be fulfilled using singles purchases online. Additionally, the ability to sell singles profitably -without fixed channel and production costs – allows music labels to profitably sell one-hit or two-hit wonders, without needing to pad the rest.

I am happy to see Preyas, Dinah and their colleagues putting some real science on this. It is my hope that this research will have an impact at the book (Amazon, iBooks), movie (MPAA), and music (RIAA) industries, as well as possibly the software industry as a whole, leading to better consumer choices *and* higher profitability.

A lot has been written about the impact of cloud computing – on-demand with massive virtualization – on deployment of services and, perhaps more importantly, the reduced cost to market of Web-based businesses, thus spurring significant entrepreneurship.

An interesting side impact is the effect on the rate of technology change. New technology platforms, and especially software platforms and frameworks, are developed and released all of the time. Yet, there is usually a relatively slow uptake on these new technologies. It takes time for people to hear about them, go up the learning curve, find projects in which to use them, and then, perhaps most painfully, find the infrastructure on which to deploy them.

The advent of many Internet platforms – blogs, Twitter for microblogging, user groups – has increased the speed of knowledge propagation. However, I would argue that the dramatically reduced cost of getting infrastructure on which to run and try a new platform is one of the single biggest factors in adoption. Quite simply, when you can try some new platform for a few dollars or less, you are far more likely to try it, and quickly discard the ones that do not solve any problems while adopting (and advocating for) those that do.

In the words of Deep Throat… “follow the money.”

I love straight talking CEOs. Most people have a pretty good BS-meter. When someone – especially their own management and especially executive management – is trying to “spin” something, or hide bad news, or similar secretive activities, people can smell it. Some have better sensors, some worse, but employee morale takes a hit, and in the worst way. Consultants like me are pretty good at ferreting out why employees are unhappy, but it is extremely hard when there is simply a sense that execs are hiding something, but employees cannot clearly articulate it, and often are afraid to mention it even if they can; after all, if management kept it secret, could their even mentioning it get them into trouble?

Given that, I have learned to really appreciate straight talking CEOs, one who say it like they mean it, hide very little, and talk with the employees, not down at them. Call it the “Anti-Wise Men” philosophy of management; unlike those in some past administrations who believed that a few really “Wise Men” with enough information could make better decisions than the rest of us, and thus deserved to be better treated, better paid, and no lip from the unwashed masses, straight-talking CEOs believe that every employee has a brain, makes their own decisions, and has what to offer.

A great story came out this week about Apple during the beginning of its revival in 1987. I won’t repeat the story here, just read the post, but for those of us with too many smooth-talking and polished executives who cannot understand how to rally the team (in history books, read HP), refreshing candor is a great way to do it. But start with trusting your staff; they are probably smarter than you, definitely in their own domain of expertise. If you cannot, you shouldn’t have hired them (or be in charge yourself).

Henry Blodget (here) put me onto this excellent analysis by Horace Dediu of Asymco  of why Apple released the iPhone 4S – despitw what it must have known would be tepid reviews – rather than a completely revamped iPhone 5.

The analysis is worth reading in its entirety, both the original and Blodget’s short commentary. However, I think two key points are worth considering at the higher level:

1. Apple is a business. Sure, Steve Jobs’ great sense of consumer desire and taste, along with his showmanship and relentless willingness to look to the future, rather than worry about cannibalizing its own markets (see Oracle), characterize its product strategy decisions. But, in the end, it is a successful business, and that means selling products that will generate large amounts of revenue at a high profit margin. That, in turn, means relentless focus on product makret fit. Apple wants to be cool… because that is what generates high demand (which leads to high revenues) and strong “must-have” sense (which leads to higher relative prices and thus higher margins). Dediu reminds us that for Apple, from its own internal analysis viewpoint, the 4S and not the 5 make the most business sense.
2. Markets change. I know that this analysis makes sense on its own for Apple. But given the change in market – lots of Android alternative options – I do not know if this analysis makes sense given the current market. I think it does, but I can see arguments to the other side.

Either way, Dediu reminds us that Apple is a business, and makes the right decisions for the company and its shareholders, even if the general media doesn’t get it.

Steve Jobs was a difficult man, as most geniuses are. The (in)famous movie “Pirates of Silicon Valley” captured so much of the complex younger man, his personal life and his interactions with competitors, partners and employees.

Yet, he was a great man, a true visionary. He changed our lives, with the first accessible personal computer, with NeXT which led to Mac OS X and the current Mac resurgence, with the iPod and the iPhone and the iPad. He had vision and flair like no one else.

Many will say he was just the right person in the right time at the right place. I say that all of them are equally important, that even with the right time and right place, no one else could have done what he did. The next generation has its own visionaries, its revolutionaries, as will the next, and each will shine in their own way. But Steve has a place in the pantheon of great entrepreneurs, perhaps one of the tallest pedestals.

He will be missed sorely.

I have been reading Eric Ries’ excellent book called “The Lean Startup,” highly recommended for anyone in the entrepreneurial business, whether it is a fast-growth tech-startup or just a local laundromat. For that matter, I also recommend it for managers at larger firms, both in terms of managing their own internal innovation and in terms of understanding where their own metrics may fall short.

One of the interesting factoids about the MBA degree (of which the author is the proud holder of one from Duke University, an innovative and collaborative environment) is that business schools were originally founded for engineers. Around the turn of the 20th century, and especially later in the century as larger companies began to grow with Sloan’s management practices, many engineers who were excellent designers and builders of innovative products, were promoted into general management roles. However, these engineers had little to no real business experience, and the ins and outs of accounting, sales, marketing, etc. were completely foreign to them. To resolve these mismatches, schools for business (literally “business schools”) were set up.

Ries’ primary thesis in his book is that entrepreneurs often confuse “vanity metrics”, numbers that look good but do not actually give insight into how the startup’s engine of growth is working and being tuned, with “value metrics”, those that give critical insight into the engine, its functioning, and whether it is time to persevere or pivot.

Ries says, rightly IMO (and yours truly has definitely been guilty of this), that product people have a tendency to believe that building better quality, better features, leads to better business results. Yes, it does, but only once you have properly identified what features and quality in which market segments actually make the engine run. Of course, everyone is guilty of this: engineers who build better quality, product managers who insist on more features, marketers who are convinced that one more campaign is what it takes, etc. But at heart, it is about knowing which of these will make growth really matter.

In that respect, Ries’ “Lean Startup” is almost like the “Fast-Forward MBA for Entrepreneurs with a More Traditional Background,” the way that business school was “school for business for engineers.”

Like most people – well, at least those who really get how startups and disruption work – I am impressed by Reed Hastings (Netflix CEO) willingness to take brutally painful short-term steps for the long-term benefit and viability of his company. He mentions several times in his posting that he worried about one issue more than any other over the last five years: will Netflix be able to make a successful transition from DVD-by-mail to streaming-over-Internet, or will it be too worried about cannibalizing its short-term cash-cow DVD business to successfully launch and grow its streaming business?

Clearly, Reed believes that splitting the business into two will give the freedom of maneouvre to the streaming business that it needs to grow and succeed. I respect and understand that. I also find it notable that the streaming business is keeping the Netflix name, while the DVD business is getting a new Qwikster name (which sounds suspiciously like the old Napster). But I have some key concerns about this structure:

1. A split like this makes a lot of sense when both businesses have a viable future, but each needs to grow without encumbering the other. Yet, it seems pretty clear that the DVD-by-mail business is going to die a slow death. Essentially, the executives and team left in Qwikster will have options that, over the long-term, will be worthless or nearly so. Further, the message to investors (and potential employees) is, “this is the dying business.”
2. A split like this makes sense when customers are likely to choose one service or the other, with very little overlap. The classic example is the RCA-Sony radio case brought by Clayton Christensen in “The Innovator’s Dilemma” (a must-read book for anyone in business). Customers may want a furniture high-quality radio from RCA, or they may want a cheap transistor radio from Sony, but they are unlikely to want both. And even if they do want both, it is likely that they accept the need to pay for both independently, even if bought from one retailer, who himself sources it from two manufacturers. But Netflix’s customers are retail, Netflix is the retailer who sources items, from whom customers want a single source of information – and as Henry Blodget points out, around half of Netflix’s customer base actually wants both. As such, splitting the business hurts the customers and the business. True, it is unlikely that any other business will pop up to offer both, since no one will go into the DVD-by-mail business at this point, but this is a business that could bring end-of-life profits for several years to the whole, and drive later adopters in.

Given the above, I am not sure I agree with Hastings’ rationale. His aggressiveness and willing to take risks for the long-term are to be commended, but sometimes they do lead to making real mistakes. I am afraid this may be one of those times.

I love America. One of my favourite books starts that way, John Keegan’s “Fields of Battle: The Wars For North America.” One of the things I love about America is the incredible drive for entrepreneurship, the idea that if you have an idea, well, follow it all the way through. You can be innovative in any market, anywhere (assuming government hasn’t enforced some monopoly), and if what you have to sell is a better product/market fit, including better customer service (see “Zappos” in the dictionary), you can succeed.

So given the above, I have struggled for years to understand why the US airlines have a quality of service – everything from how they treat passengers at the airport and on the airplane, in all classes of service, to the design of seats and the lounges – that is so far below those of prime European and Asian airlines.

What triggered this thought, besides my regular long-haul overseas flights, is a shower. I flew into Newark Airport early this morning, spent all day running around Manhattan, and then took the train back into Newark for my evening flight. As a Platinum member, I had access to the lounge, called the “Presidents Club” by Continental, and looked forward to a nice hot shower.

I did get my shower, it was hot, refreshing, and I felt better about finishing my day, before boarding a 10.5 hour flight. But there is no doubt in my mind that the quality of the shower, and the rest of the lounge, falls far far below what I have seen in Europe and in Asia… even over a decade ago. Newark Airport is one of Continental’s main hubs, so the lounge there is its top-of-the-line lounge; they even tout the awards it has won (although the announcement next to it about spending $500MM to refurbish the lounges makes one wonder). The lounge is nice, no question. The shower room was cold and sterile, the walls bare and industrial; the power ports throughout the lounge do not work; and the food is simple but there are no real meals. In other words, it is not remotely like what I recall of the British Airways lounges in JFK and Heathrow – even before the creation of the Terraces Lounges, and not even counting the First Class Lounge. I used those lounged over a decade ago. It is not even in the same class. Needless to say, it isn’t even in the same league as the lounges of the Asian airlines – Cathay Pacific and Singapore, notably, as well as others.

I have heard, and have said myself, that the Asian and European airlines have an “ethic of service” that Americans do not. But that is simply not true. Americans have far less patience for being treated poorly than Europeans, who are used to obtuse bureaucrats. Further, Americans excel at competition, creating great customer service differentiation opportunities, whereas the Europeans protect their national champions, especially air carriers like British, Lufthansa, Air France, from any form of competition.

So what is it? What do US-based carriers continue to underwhelm, despite real competition and opportunities to exceed?

The Atlantic had a funny article – well, funny to me, perhaps not to everyone – that Angry Birds, the game, is “costing” American businesses alone $1.5BN in lost wages and/or productivity per year, on average.  The math is very entertaining, and makes some assumptions, which they themselves admit are assumptions. Either way, they come up with the rough $1.5BN lost wages figure.

Whether the assumptions are off by 33% up – and the real number is $1BN – or 50% down – and the real number is $2BN – or any other error, the problem here is not technical, i.e. how many minutes are spent, how many of those by Americans, and how many at work, but fundamental, i.e. does it really matter?

Smart American businesses long ago stopped measuring employees by hour, even those that get paid by the hour. Employees have a task. If the task gets done, it doesn’t matter if you watched NCAA, used Facebook or played Angry Birds, the job was done. If the job was not done, well, then, it doesn’t matter if you watched NCAA, used Facebook played Angry Birds, or actually worked, the job was not done.

Fundamentally, if you are monitoring your employees every hour or minute, in other words worrying about them playing Angry Birds, then you have an problem, not because of Angry Birds, but because you don’t know how to measure success, and thus how to achieve it.

Focus on getting the job done, whatever it takes; the rest follows.