Wednesday, March 31, 2010

Stealth mode for startups: Whether and when?

There's an ongoing debate as to whether or not startups should operate in stealth mode until they're ready to launch. The answer, like most things in life, depends on timing. Before I get to the breakdown, however, let me address a very important point: Most startups that choose to go into stealth mode do so for the wrong reasons. They believe that a big competitor will see what they're doing and copy it. However, the fact is that big companies overwhelmingly dismiss little competitors, especially ones that haven't yet started delivering products. They don't see startups as threats. A startup can become a big company before it finally starts to get serious attention from other big companies.

Similarly, it's usually not necessary to worry about another startup copying your product or service. A startup that's looking for other people's ideas to implement is probably not going to do a very good job of it. Every startup faces the same kinds of execution challenges, so you're likely to be shipping when they're still figuring out how to implement your ideas.

In my opinion, the best argument for stealth is not to avoid educating competitors but rather, to avoid disappointing customers. I wrote a few weeks ago about not telegraphing your punches--not getting customers excited about your products well in advance of when you can deliver. I used Play and RED as two examples of companies that made their announcements years before they were able to deliver products. If you have a successful announcement, you'll get potential customers very excited. With luck, some of them, perhaps a lot of them, will be ready to buy on the day that you announce. However, as time goes on and you're unable to deliver, you lose credibility. Customers become impatient and look for alternatives, especially if they have to buy something in order to fill a need. The customers that buy alternatives are lost to you for at least one buying cycle, and may be lost forever.

In general, I'm not a big fan of stealth. It makes it much harder to identify potential customers and investors, because you've got to put everyone under NDA in order to say anything about what you're doing. It's perfectly fine to talk about what you're doing in general terms. When your startup is in its early phases, you can do effective customer discovery and even validation without disclosing too many details of what you're working on.

My belief is that you shouldn't do an announcement until you're within 90 days of delivering at least a Minimum Viable Product (MVP) to customers. That can certainly include a public beta. You don't necessarily need to be ready to generate revenue in 90 days, but you should be able to deliver a product for testing within 90 days.

Ninety days is a guideline; it's not carved in stone. However, the longer that it takes between announcement and shipment, the more credibility you'll lose and the more effort and cost it will take to reestablish customer interest. You may even have to redo the announcement when you ship. What's even worse is the "tease": Making multiple announcements without shipping anything. You lose credibility with every announcement that's not closely followed by a release.

To summarize, it's usually not necessary to operate in stealth mode in order to protect your ideas from competitors; most competitors won't care until you're big enough to steal significant market share from them. However, you should limit what you say to general information until you're close to releasing a product, at least for public beta.
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Tuesday, March 30, 2010

TV Everywhere = restraint of trade?

I just finished reading BusinessWeek's article from a couple of weeks ago on TV Everywhere. It gives the history of TV Everywhere as essentially a deal between the two largest US cable operators, Comcast and Time Warner Cable, to control distribution of video content over the Internet by limiting its availability to existing cable subscribers only. It also documents the difficulties that alternate distributors such as Netflix, Boxee and Sezmi have had in striking deals for cable and movie studio content, and points out that Sezmi has actually had to pay more than the cable operators for some content, even though it still has miniscule market share. It wraps it up with a few quotes from content providers saying that they'd be crazy to do deals with alternate distributors for fear of angering their largest customers, the cable operators.

Anyone who knows anything about U.S. antitrust law would see a host of red flags in the first paragraph of this post. The two largest cable operators colluded to prevent competition from Internet content distributors. Brian Roberts, the head of Comcast, had to be dissuaded from trying to force the individual content providers to shut down their own distribution sites. Alternate distribution services are at a competitive disadvantage because they can't get most of the content available to cable operators and have to pay more than cable operators for the content that they do get. The content providers confirm that they're holding back their content from alternative distribution channels to avoid retaliation by the major cable operators. So we've got collusion, restraint of trade and price fixing.

Time Warner and Comcast don't get out of the collusion charge because they don't directly compete with each other, since they were working together to limit mutual competitors. The cable networks and movie studios are in it up to their ears, and Comcast is trying to buy control of NBC Universal, which will give them even more control over cable programming and, for the first time, motion pictures and over-the-air services as well.

If I were with the U.S. Department of Justice, Federal Trade Commission or one of the companies named in the article like Netflix, Boxee and Sezmi, I'd be salivating over the opportunities for criminal and civil antitrust action. TV Everywhere, initially envisioned as a technique for the cable companies to take over control of video distribution on the Internet, may end up being the "step too far" that ends the cable companies' monopoly over video content distribution to homes.
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Monday, March 29, 2010

Sony: What were once strengths are now weaknesses

In the late 1980s, I worked for Toshiba and traveled frequently to Japan. The Japanese electronics brands that we know in the U.S. look considerably different in Japan. One big difference is that they were in lots of (sometimes bizarre) businesses. In those days, Sony offered financial services. It sold real estate and ran an Internet service provider. It ran a travel agency. Every big Japanese electronics firm was diversified in ways that would cause you to do a double-take to make sure you had read that sign correctly. Panasonic refrigerators? Check. Hitachi air conditioners? Check.

Today's New York Times has an article on Sony's pursuit of a ..."Bold Success to Match Its Scale." The article starts with a description of a new Sony store in Nagoya, Japan that's largely a clone of the Apple Store design, then talks about how Sony's new 3D HDTVs and partnership with Google are evidence of a comeback. However, it's Sony's very scale that's at the core of many of its problems.

As the article points out, the Sony store is a spin on Apple's successful model (although it can also be said that Apple took its inspiration from the Sony Style stores that started in Apple's backyard in San Francisco.) Sony is already somewhat late to 3D; Samsung and LG are already shipping 3D HDTVs, and Panasonic will be showing its $20,000 3D camcorder at NAB in a couple of weeks. It's building a Sony Online Store that's basically iTunes several years late. The Sony/Google/Intel initiative is following the same course that Apple took a few years ago with Apple TV. Sony's new Playstation Move controller looks like a Wiimote with a dollop of ice cream on top.

The fact is that Sony is in a raft of markets but leads in very few. It's still the leader in broadcast and digital cinematography cameras and camcorders, but that's not a huge market. It lost its lead in consumer HDTV to Samsung and in audio players to Apple. It similarly lost its lead in game consoles to Nintendo and Microsoft, and has never been able to push Nintendo out of the top position in portable consoles. It gave up its early lead in eBook readers to Amazon. It's an also-ran in portable computers and mobile phones. Sony's strong in audio recordings and motion pictures, but it's not the market leader in either business.

My belief is that Sony is trying to do too much. The companies that are really successful focus on a limited number of markets, technologies and opportunities. No company could do everything that Sony does and do it well.

It's time for Sony's top management to start thinking about splitting the company up, not for financial benefits, but to better compete in the segments that it chooses. Sony could divest some of the smaller businesses and focus on the areas of greatest potential. It could give the operating units more autonomy and allow them to make decisions that are best for their business, not necessarily best for the strategic interests of some other Sony division.

Apple succeeds through obsessive focus. Samsung is dominant in a few critical markets, such as HDTV and memory. Research in Motion only does BlackBerry smartphones, and it does them very well. By trying to do too much, Sony is almost guaranteeing that it's going to fail at many things. The company has to develop the discipline necessary to focus on a few opportunities, rather than to grab at every opportunity.
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Sunday, March 28, 2010

Why the App Store may be less important to the iPad than it is to the iPhone

I was reading an interesting post a few days ago that argued that a big reason for the popularity of App Store apps on the iPhone is how hard it is to use web apps on that device. Make no mistake, Safari on the iPhone is a very good browser, and the iPhone is a very good web environment. However, it's almost always easier to use a dedicated iPhone app than a web app.

The iPad may change that equation. The iPad's bigger screen size, bigger on-screen keyboard and better performance should make web apps much more viable on that platform. Web apps can be written in far more languages than iPad apps, they should work on multiple platforms (so long as they're not written in Flash), and they don't need to go through the App Store approval process. There will undoubtedly be a healthy market for native iPad apps, and I'm in no way against native apps. However, I believe that web apps will work much better on the iPad than on the iPhone or iPod touch, and you're going to see a lot of them.
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A preview of some things to look for at NAB

I don't expect anything revolutionary at NAB this year, except for a lot of 3D, but the cost of HD capture and post-production keeps going down, so there will be lots to see. Here are a few things to look out for, in no particular order:
  • Adobe will be launching Creative Suite 5 on the opening day of NAB. It's already previewing some interesting new Photoshop and Premiere Pro features, including the ability to natively edit AVCHD footage without first converting it into another format.
  • Sony will be showing its new NXCAM camcorders, and I wouldn't be surprised to see it show prototypes of its new AVCHD-compatible DSLRs.
  • Panasonic will be showing its new $20,000 3D camcorder, which should be getting close to shipment.
  • Canon will be showing a camcorder with its new MPEG-2 Full HD codec, most likely along with its line of videos DSLRs.
  • ARRI will be showing its new Alexa (A-EV/A-OV) digital cinematography cameras, starting at 50,000 Euros.
  • RED will be hosting an offsite event (registration required) at the Tropicana Hotel on April 14th where it'll be showing the current state of Scarlet and EPIC.
  • Lowel and Videssence will be showing their first LED lights. The advantages of LEDs over other forms of lighting (no flicker, almost infinite color control, virtually no heat and much lower power consumption) are obvious. Just about everyone in the video lighting business is now offering LED products.
  • DSLRs will be another big theme of the show. Many companies will be showing add-ons for making them more usable for video applications (think Redrock Micro, Zacuto, Chrosziel and many others).
  • No hints yet on any big new announcements from Avid (which will be exhibiting at NAB) or Apple (which won't be.)
If you're going, be sure to pre-plan your booth visits and organize your time, because the Las Vegas Convention Center is huge and it takes time to get around the city. (The RED event, for example, is at the Tropicana, which is across from McCarran International Airport at the far south end of the Strip. Allow plenty of time to get there from the Convention Center.) Use the monorail as much as you can to avoid cab lines. If you're focused, you can see the show in a full day, but if you plan to attend sessions or off-site exhibits, allow yourself more time.
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Saturday, March 27, 2010

Housing and the "New Economy"

Housing isn't a topic that I normally cover, but there's a seismic shift happening in the housing market that hasn't gotten a lot of attention. We all know that the U.S. housing market is still a wreck, and it's going to take years to recover. The housing market as we knew it until a couple of years ago was really born at the end of World War II, when millions of GIs came back from Europe and the Pacific and needed places to live. Bill Levitt's Levittown and similar developments were the beginning of the suburban movement and the goal of universal home ownership. Before the war, it was common to live in apartments or rented homes in major cities; after the war, the goal was to move out of the city and own your own home.

Concurrent with the suburban home ownership movement was lifetime employment--the goal (and reality) for most people was that they joined a company right out of high school or college and stayed there for most of their careers. It was safe to buy a home, because unless you were transferred, you were going to stay in the same place for many years.

Flash forward to today: Lifetime employment is only a distant memory, companies are relying on temporary workers, contractors and consultants to do work that was formerly done by employees, and three years is a long time to work for a single company. The U.S. workforce is increasingly temporary and transient. In this economy, owning a home decreases your flexibility. Years ago, companies would assist employees with selling their homes in one market and buying another one when they have to move, but that assistance is increasingly rare.There's no relocation assistance for contract or temporary workers. In addition, the days of infinite home price appreciation are over, as the millions of homeowners whose mortgages are "underwater" can attest.

So what does all this mean? In the long run, home prices will recover, although they'll never fully recover in some markets. However, the transient nature of work is a permanent structural change. We're never going back to lifetime employment. One outcome is that far more people will choose to rent rather than own. The drive to live in a single-family house won't go away, but a lot of the existing stock of homes will go from owner-occupied to owned for rental. That in turn will affect how homes are built, furnished and maintained. People who own rental homes will tell you that renters can do a lot of damage, so this new generation of rental homes will need to be more difficult to damage and both easier and cheaper to repair.

We may also see a shift away from the suburbs and back to living in cities, near work. The suburb of Chicago that I live in could best be descrbed as bucolic; it has a lot of benefits, but convenient access to work and public transit isn't among them. The movement of workers closer to their jobs, or to where they can get to a lot of different jobs, is inevitable.

So, home ownership is likely to shift from a majority of owner-occupiers to landlords owning and renting out multiple homes, and the demand for multi-unit housing in major cities is likely to increase. In both cases, however, the price and terms of rentals have to conform to the needs and expectations of the new transient workforce. Housing that's too expensive for the value offered, or that demands longer leases than tenants are able to commit to, will remain empty.

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New look for The Feldman File blog

Google is experimenting with a new Template Designer in order to be more competitive with blogging platforms like WordPress. I've used it to redesign The Feldman File--it's simple to use and surprisingly flexible. However, this blog is for you, so what do you think? Is the new design readable? Do you like it or would you prefer that I try something simpler or go back to the old design? Please let me know!
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Wednesday, March 24, 2010

Apple introduce its own HDTV? I think not

An analyst report by Piper Jaffray's Gene Munster is getting some traction. In it, he predicts that Apple will release an Internet-enabled $2,000 HDTV in the next two to four years. I don't buy it, at least not in the way that Munster foresees. Here's why:
  • Companies have been building HTPCs for years, and no one has made any significant headway in the market.
  • Apple TV has been on the market for several years, and it's never gotten past the "hobby" stage for Apple.
  • HDTVs are almost commodity products, and it's going to be extremely difficult for Apple to make the kind of hardware margins that it targets and be price-competitive.
I believe that Apple's best opportunities are to rethink Apple TV and open it to non-Apple content, and to add more video to the iTunes store and make it available on every device that Apple sells. Whether that means that Apple and the iTunes store will replace cable, satellite and IPTV operators remains to be seen. The business challenges are far more daunting than the technical ones.

If the FCC mandates that cable operators switch to software-defined set-top boxes and drop CableCARD, I can easily see a next-generation Apple TV that does everything that today's set-top boxes and DVRs do, plus internet connectivity to the iTunes store and to third-party content providers. I don't believe that Apple will get into the HDTV display market.

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Tuesday, March 23, 2010

For startups, it's money that matters (in different ways, at different times)

So you're thinking, "Of course money matters! Isn't that the point?" For startups. money means different things at different stages of development, and using it for the wrong things can be very dangerous. At inception, seed and early stages, money means investment in development and growth. The purpose of capital raised early on should be to develop the startup's products and services, do customer development, find a good product/market fit and have the means to pivot if you have to in order to find a good fit. However, for a good number of startups, especially in the dot-com boom days, early-stage money went for big offices, lavish furnishings, expensive cars and other unproductive uses. The goal of money in this stage is to invest in order to generate revenue.

At later stages, money can be used to invest in the business for rapid growth or, as Ben Horowitz puts it, to "crush your competition." It's also at these later stages that the emphasis shifts from plowing money back into the company to compensating investors for their investments and employees for their hard work. As I've written previously, successful startups have lots of exit strategies. If the company goes IPO, that provides the liquidity event for everyone. If the company is acquired, that may provide a decent return for the investors and something for the employees--it depends on the acquisition price. However, even if the company remains private and independent, it still has to put money back into the hands of its investors and employees.

It's at this stage where it's okay to start thinking about paying competitive salaries, creature comforts, and the other niceties of having money. If a startup continues to skimp on salaries, benefits and the like at this point, and if it refuses give investors a decent return, even if through dividends, it will lose key employees, increase employee turnover (which always increases cost and decreases efficiency) and tick off investors. Those startups that start cheap and stay cheap end up paying for it, sooner or later.

So money means different things, and should be used for different things, at different stages of a startup's development. Early on, use money to invest in the business; later on, use money as a reward.
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Monday, March 22, 2010

What Hulu means when it says "We apologize for any inconvenience"

This morning at DEMO Spring, Hillcrest Labs released an interesting video browser called Kylo. Kylo includes links to many Internet video sites, including Hulu. As of yesterday, Hulu worked perfectly in Kylo, but when Hillcrest Labs tried to demonstrate it today, Hulu stopped working, in a very peculiar way. The Hulu site loaded and displayed, it could be navigated, but whenever they tried to actually play a video, they got the following message:

"Unfortunately, this video is not available on your platform. We apologize for any inconvenience."

Apparently, Hulu has confirmed that it deliberately blocked Kylo. It took them all of a few hours to decide that Kylo was a terrible threat that had to be neutralized. Perhaps Kylo was stealing Hulu's content, just like any despicable web browser like Internet Explorer or Firefox. In any event, Hulu demonstrated that when it says "We apologize for any inconvenience", what it really means is "F-ck y-u".
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Amazon demonstrates Kindle for the iPad

Earlier today, Amazon took the wraps off of its Kindle Reader for the iPad. Details are still sketchy, and Amazon has only released three screen shots. Also, so far as I can tell, it hasn't yet been approved by Apple. However, what Amazon's shown looks good, and it brings full color, full page displays to the Kindle.

I've long believed that Amazon's end game is to get out of the eBook reader hardware business. Hardware is a very difficult and expensive business, and it doesn't play to Amazon's strengths. Amazon needed the Kindle hardware in order to build a large base of eBook customers and thus drive eBook adoption and sales. Now that tablets are becoming available in a range of sizes and prices, the need for Amazon to have its own readers is declining.
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Sunday, March 21, 2010


I visited a startup in Silicon Valley a couple of months ago; for purposes of confidentiality I won't name them. They're executing a business plan that calls for them to develop an online eCommerce service, client software and a new hardware platform. They started from scratch on all of it, and their goal is to get to market about a year after the company was first conceived. They're well funded, but they're obviously not generating any ongoing revenue, and they're still in stealth mode.

The single most important thing that a startup has to do is to focus. There's never enough money, time or resources. The three things that this startup is trying to do--Internet services, client software and hardware--would be big challenges for three startups, but they're trying to do it all themselves.

The irony is that they don't have to do everything they're trying to do. There are plenty of software clients out there that do what they need, or they could contract out for the client's development. The hardware segment they're focusing on is one of the most active and rapidly evolving areas in consumer electronics. There are (or certainly will be by the time they launch) tons of platforms that they could support, but they've deliberately chosen to build their own hardware platform. They could focus on their eCommerce service, which is going to be a big enough challenge in itself.

By trying to do everything themselves, they're scattering their resources and dramatically increasing the risk of failure. Also, by staying in stealth mode for so long, they're running the risk of coming to market with a poor product/market fit. They think that staying in stealth mode will protect them from competitors, but competitors don't need them to understand what the market needs.

The single most important thing that a startup must do is focus. Focusing helps you to conserve resources, pivot more adroitly, and leverage external partners and technologies. It decreases the potential points of failure. The company I just described is one of those "fat startups"; being fat has enabled it to unnecessarily scatter its efforts.

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Saturday, March 20, 2010

Jack Sprat and the semantics of startups

"Jack Sprat could eat no fat.
His wife could eat no lean.
And between the both of them, you see
They licked the platter clean."

It looks like we've got yet another semantic dustup going on in Startup City. A couple of weeks ago it was about ridding the world of the term "fail fast", and last week, a battle broke out between Lean and "fat" startups. The breaker-outer was Ben Horowitz of Andreessen Horowitz, who wrote an op-ed piece for the Wall Street Journal's All Things Digital website titled  "The Case For the Fat Startup." In his article, Horowitz reviewed the history of Loudcloud and Opsware, the companies that he and Marc Andreessen co-founded, and argued, in his words, 'The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition."

Fred Wilson, a well-known New York-based VC, argued in his blog post titled "Being Fat Is Not Healthy" that "I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's (sic) sweet spot." He points out that Loudcloud and Opsware raised $350MM in four rounds of financing, including an IPO, in the space of 15 months. The only reason that they were able to do that was because the companies had been co-founded by Marc Andreessen, and Netscape made a bunch of people rich.

If Loudcloud and Opsware had been founded by two different people, even if their resulting services and products were exactly the same, they would have had a dramatically different outcome, because they would have only been able to raise a fraction of the capital. In statistics, we call something that is so far outside the realm of normal occurence an "outlier". Loudcloud and Opsware were outliers, and using an outlier as proof of the validity of a concept is like saying "I won $10 million in the lottery, so anyone can do it." Technically, yes, "anyone" can do it, but the odds against it are astronomical.

Wilson argues that once you've got your product/market fit right and you're sure that you're pursuing a real market and not a mirage, then go ahead and raise all the money that you can. Loudcloud didn't do that. It raised and spent an enormous amount of money only to learn that it didn't have a good product/market fit. (Horowitz claims that Loudcloud had, in fact, found a viable product/market fit, but then why did he decide to sell it off and focus on software?) It could have learned that it had an insufficiently appealing product/market fit by spending only a fraction as much as it did, and then put its resources into the real market opportunity that it finally identified. And it's true that reaching a product/market fit isn't a binary decision; it takes time. However, I'd argue that you want to floor the accelerator when you've found the right fit, not the first fit.

I worked with Ben at Netscape, and I consider him a friend, but the approach he advocates smacks of both "Ready, Fire, Aim" thinking and the now-discredited "get big fast" philosophy of the dot-com boom. I'd argue that Loudcloud spent the money because it had access to the money. If it hadn't had access to so much money, it would have been run very differently.

When you know that what you're doing is right, by all means raise the money you need to "crush your competition." There are also businesses where the capital investment required to even figure out if you're going in the right direction is so high that there's no alternative to being a fat startup. But for most software companies, being fat won't be a winning strategy for either entrepreneurs or investors.

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Friday, March 19, 2010

Here comes your $99 eBook reader/tablet

Earlier this week, Marvell displayed engineering prototypes of "Moby", a tablet powered by its Armada processor that will run either Android or Windows Mobile. Moby will come will built-in WiFi, Bluetooth and GPS, the ability to encode and decode 1080p HD video in real time and 3D graphics support. The tablet will support Flash, and Marvell claims that end-user devices based on its reference design will be able to be sold for $99. As Technologizer pointed out, the tablets shown at this week's Future of Publishing Summit were rough engineering prototypes, so Marvell's claim that production versions ready for customer delivery will be ready by the end of the year is probably correct.

One interesting aspect is that Marvell is targeting the education eBook market with Moby; the company's press release is full of references to the educational market, and Marvell even plans to give Mobys away to every student at an at-risk school once the device goes into production. There have been companies targeting the low end of the eBook reader market, but $99 is an awfully low price point to beat. The advantages of full color, video and Flash will outweigh any disadvantages of using an LCD display instead of e-Ink for educational applications.

In any event, the tablet market is getting very crowded, very quickly, and Marvell is positioning itself to be one of the arms merchants.

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Palm: Dying by self-inflicted wounds

Today, Engadget ran a long post about what Palm needs to do in order to survive. The article reads more like a list of things not to do when you launch a product. Most people agree that when the Palm Pre was first shown at CES in January 2009, it had an innovative operating system and a decent, if not great, hardware platform. However, from CES forward, Palm made one major mistake after another. Here's the summarized list from the Engadget article:
  1. Palm waited six months to ship the Pre after it showed it at CES; by that time, much of the initial interest had cooled.
  2. Palm shipped the Pre only days before Apple announced the iPhone 3GS, which immediately stole most of the Pre's thunder.
  3. Palm's exclusive partner for the Pre launch was Sprint, probably the weakest of the major US wireless carriers. Palm should have done whatever it had to do to get the Pre into AT&T, Verizon or both.
  4. There was no Software Development Kit available for the Palm Pre when it shipped. It took a long time for Palm to ship the SDK, so only a handful of applications were available while the iPhone and Android were gaining apps tens or hundreds of times faster. Also, Palm has only recently gotten around to shipping a PDK that enables access to the low-level functions of the Pre and Pixi.
  5. Palm had awful marketing at launch, especially an incomprehensible advertising campaign that told buyers nothing about what made the Pre special or why they should buy it.
  6. When Verizon finally got the Pre Plus and Pixi Plus, it advertised the phone as suitable only for housewives from the 70s. Palm should have done everything it could to nix Verizon's campaign, but whatever it did wasn't enough.
  7. Rather than develop its own content management application or license something from a third party, Palm deliberately broke USB compatibility rules in order to make the Pre look like an iPhone to iTunes. Apple promptly retaliated, closed off iTunes and got the USB Implementers Forum to order Palm to stop masquerading as Apple.
  8. The Palm Pixi makes no sense--it can't compete with other phones at its price point, and it was deliberately underpowered by Palm so as not to compete with the Pre.
  9. The Pre had lots of hardware problems, most of which Palm refused to acknowledge or take responsibility for.
I'm going to stop there. My point isn't that Palm shouldn't fix these problems, but rather that it never should have had these problems in the first place. Everyone makes mistakes when they launch new products; we're all human. Palm, however, made so many disastrous mistakes that the company is now probably too far gone for any survival guide. Writing a survival guide for Palm is like telling the deceased at a funeral home to stop smoking. It's already too late.
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Reed Hundt did something "naughty" with the HDTV Transition

You may remember Reed Hundt. He was the Chairman of the FCC under Bill Clinton, at the time that agency was planning for the transition to HDTV. The original plan was to implement HDTV in the same way as Japan had done it--one resolution, one refresh rate, one single standard. The FCC instead mandated a convoluted standard that required some 17 combinations of resolutions and refresh rates to be supported; even what we now consider Standard Definition was included in the HD standard, in order to support data applications over broadcast bandwidth. Chairman Hundt invited Microsoft into the process, and Microsoft demanded a series of changes to the standard in order to support its plans. What was originally a clean, straightforward and reasonably inexpensive upgrade became complex and expensive for everyone--broadcasters, cable and satellite operators, and consumers.

Earlier this month, at the Columbia Business School, Mr. Hundt gave a speech where he admitted that he and his associates deliberately logjammed the HDTV transition with the intention of killing it entirely. Here's a direct quote: "This is a little naughty...we delayed the transition to HDTV, and fought a big battle against the whole idea but we lost." If Mr. Hundt and his associates were so dead-set against HDTV, why didn't they fight it out in the open instead of waging a passive-aggressive war of changing the specifications and moving the goalposts? If he and his associates had been honest, we wouldn't need this National Broadband Plan--there would be plenty of bandwidth for broadcasters and for broadband wireless services. Instead, we've got the world's most expensive and convoluted HDTV system, many consumers still aren't getting true HD, and tons of bandwidth is lying fallow in subchannels mandated by the FCC.

We have to dramatically increase the availability of broadband access at prices that U.S. consumers can afford. As I've written previously, the National Broadband Plan says precious little about how it's going to lower costs to consumers, and puts few demands on the incumbent telephone and cable providers. It's biased to take its "pound of flesh" from broadcasters. Is what we're seeing a real attempt to make broadband available to everyone at an affordable price, or is it merely the continuation of Mr. Hundt's now almost 20-year-long war against broadcasters?

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Thursday, March 18, 2010

You're only as good as your partners

According to the New York Times, Google has partnered with Intel, Sony and Logitech to port Android and a set of Internet-oriented applications to set-top boxes, HDTVs and other devices. Google is also said to be working with Dish Network to implement Android and similar applications in Dish's satellite receivers.

In any kind of industry consortium, you're only as good as your partners. Logitech, which is being called on to provide peripherals including a remote control, is an excellent choice, although their inclusion in the consortium seems like overkill, given that many companies can do remote controls well. The quality of the partners goes down from there:
  • Intel has a terrible track record with consumer electronics; it repeatedly announces industry initiatives and partnerships, but very little comes from them, because Intel's chips are both overkill and overpriced for most consumer electronics applications.
  • Sony has lost its market leadership in consumer electronics. The company's engineers strive to lock customers into Sony technologies, and that has made the company an also-ran in many markets. The company's fierce unwillingness to compromise on Blu-Ray delayed the entire consumer electronics industry from launching the technology for more than a year, and its arrogant overpricing and over-complication of the Playstation 3 allowed Nintendo and Microsoft to dominate the console market until very recently.
  • Dish is a weak #2 in the U.S. satellite television market, and its repeated court losses against TiVo mean that the company may not remain a viable satellite receiver or set-top box manufacturer.
I would feel a lot more comfortable about this effort if Google had managed to attract a couple of ARM licensees and additional consumer electronics manufacturers such as Samsung and Panasonic. (Signing up Samsung would have gotten them both the ARM processors and additional consumer electronics clout.) Google may be planning to add more companies to the consortium, but if this is all they get, I don't see Google TV gaining much market traction.

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Wednesday, March 17, 2010

Google can't call the Nexus One "Nexus One"

On top of the slow sales for Google's Nexus One smartphone comes a bombshell from the U.S. Patent and Trademark Office (USPTO): Google's application for Nexus One as a trademark was refused because it's too similar to the Nexus trademark held by Integra Telecom. It's hard to believe that Google's trademark counsel didn't find and report this conflict.

Google can fight the ruling with the USPTO, which will take months, it can license the trademark from Integra Telecom, or it can find a new name for its smartphone. I'm betting that Integra Telecom is going to get a nice payday, whether Google does a friendly deal to license the Nexus trademark or Integra takes them to court for trademark infringement. Even with its slow sales, Google now has too much equity invested in the Nexus One trademark to drop it without a fight.
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Tuesday, March 16, 2010

The Department of Unfortunate Names Department

The new issue of Videography magazine went out today, and in the back, there's an interview with NBC Universal's Vice-President of Digital Content, Cameron Death. I can only imagine what he went through when he was growing up. To indicate his answers to the writer's questions, the magazine said that the answers were given by Death.

He should have considered a career in Human Relations: "Mr. Death wants to see you in his office." "Next week's seminar on life insurance benefits will be given by Mr. Death." "I heard you were just fired! 'Yes, I was terminated by Mr. Death.'" And so on.
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The 2010 Census: Are we missing something?

Regular readers of this blog (both of you) know that I've spent a lot of my career doing market research. In the United States, the decennial (every ten years) Census is the single most important source of governmental and consumer research. Every household in the U.S. is required to participate in the Census, and it represents the "ground truth" dataset used to calibrate governmental, commercial and academic market research databases. Every ten years, the Census allows us to reset, recalibrate and build a strong base for forecasts.

I received the Census form yesterday and filled it out as instructed. In previous years, there were two forms: A short form, roughly equivalent to the 10-question form I filled out, and a long form which asked far more questions and got far more detailed responses. Most people received the short form, while the long form was sent to a statistically-selected sample of the population. In 2000, I received and filled out the long form.

For 2010, the long form is gone, and everyone fills out the short form. The 2010 form asks questions about age, race, ethnicity and housing. There are no questions about employment, income, or the more detailed ethnic, relational and housing questions that we've come to expect from the Census. Instead, a small sample of households, college residence halls, nursing homes, etc. will get the American Community Survey (ACS), which the Census Bureau sends every three years (2007 was the first year). Households who receive both the 2010 Census form and the ACS will have to complete and return both forms.

The information collected in the 2010 Census, while important, will no longer be as useful or insightful for governmental and commercial purposes as previous surveys. A lot of extremely useful information on employment, income, housing and more will be lost, and the ACS will only provide a statistical approximation. The whole reason for doing the Census is to completely measure the population, not a sample of the population. We may be losing too much for the little bit of money that we're saving.
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Is Microsoft protecting the wrong thing?

For decades, Microsoft's strategy has been to protect sales of Windows and Office at all costs. Those are the company's revenue and profit centers, and Microsoft's inability to make money online or with its consumer electronic business has made protecting Windows and Office a self-fulfilling prophecy--they need to protect their cash cows because they can't build new ones.

I'm one of those people who's still running Windows XP, because Microsoft is basically requiring XP users to "forklift upgrade" if they want to go to Windows 7. I run Windows 7 on my netbook and it works fine, because I was able to start with a bare machine. I've used my current XP system for four years and shudder to think about buying a new system and reinstalling software from scratch.

There are a lot of people in the same boat, but Microsoft is showing all of us the friendly middle finger. The trend started with experimental products like Pivot--sorry, but they only work on Vista or 7. Yesterday, Microsoft made the Windows Phone 7 Series SDK available for free download, but even though the instructions say that it'll work on Windows XP, it doesn't. The installer demands Vista or better. Then, Microsoft released the preview version of IE 9, and again, it requires Vista or 7.

If I was so motivated to get a new system and reinstall all my software in order to use these new Microsoft products, I'd do it, but I'm not, and I don't see anything there that would justify spending either the money or the time. I'll happily continue working on Android on XP and the iPhone on my Mac. The Microsoft Office team was able to figure out how to get Office 2010 to work perfectly fine on XP. Microsoft should be looking forward to build new user bases and new businesses, not backward to protect Windows revenues at all costs.

Update: I've come up with a personal solution, which is to install Windows 7 under Parallels Desktop on my iMac. It seems ridiculous that my most economical solution to Microsoft's "push Windows 7" strategy is to run it on a Mac.
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Monday, March 15, 2010

The most important thing left out of the National Broadband Plan

The Executive Summary of the National Broadband Plan was released today by the FCC (PDF link), and what's been proposed is largely in line with what was leaked in the last few weeks. The FCC wants to get affordable broadband service with 100 Mbps download and 50 Mbps upload speeds into at least 100 million homes by the end of this decade. The Plan proposes lots of ways to get there, from subsidizing expansion of wired Internet connections in rural communities to reallocating 500MHz of wireless bandwidth to broadband service. However, for all the platitudes in the plan about lowering costs and making broadband service more affordable, there's precious little (at least in the executive summary) proposed to actually back up that intent.

A few years ago, when I was an industry analyst covering the IPTV market, I regularly traveled to Europe. My visits to France were particularly enlightening. There were multiple service providers offering IPTV, high-speed Internet and local & long distance phone service at the equivalent of around $30 a month; less than one-third the price of the $99 triple-play deals offered in the U.S., with similar or better channel selections and Internet speeds. As you can imagine, the French services were wildly popular.

So why was triple-play service so much less expensive in France (and so much better)? The French Government required France Telecom to make its lines available to competitors at wholesale prices. Far from slowing down the growth of broadband access, the French Government's decision caused usage of broadband services to explode for everyone, including France Telecom.

Telephone companies in the U.S. were once required to provide their lines available to competitors on a wholesale basis, and the U.S. had a healthy competitive market for DSL services. Cable operators, on the other hand, were never required to make their networks available to competitors. In the Clinton Administration, the same team that drafted the National Broadband Plan allowed telephone companies to stop making their networks available to competitors as part of the Telecommunications Act of 1996, ostensibly to encourage phone companies to make bigger investments in their networks and further the growth of broadband.

We saw what happened: Most of the phone companies that were originally part of AT&T got consolidated back into AT&T. As a practical matter, most U.S. households have a choice of broadband service from two suppliers--the incumbent telephone company and cable operator. There's no meaningful price competition. U.S. households pay much more for much slower Internet service than do households in many other countries.

I'm not saying that the National Broadband Plan doesn't have merit, or that it shouldn't be taken seriously. What I am saying is that the thing that's most likely to increase competition, lower costs and make more broadband access available is to open up the existing cable and telecom networks for wholesale availability. That idea is nowhere to be found in the National Broadband Plan, and there's no surprise why.

Update, March 22, 2010: The Berkman Center for Internet & Society at Harvard University did an extensive study of broadband in the U.S. and the rest of the world for the FCC, and released the report, "Next Generation Connectivity" in February, 2010. The report speaks to the points that I made in this blog post, plus much more. Click here to access the entire study, or visit this article at the New York Times for a summary of the relevant points.
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Sunday, March 14, 2010

Coming Wednesday: Open-Source Set-Top Boxes?

The FCC is going to release its long-awaited National Broadband Plan this coming Wednesday. Details of the plan are leaking out, and broadcasters are the group that stands to lose the most--see Harry Jessell's column on TVNewsCheck for an analysis of and link to a speech by Reed Hundt, a former Chairman of the FCC and one of the architects of the new Plan.

One element of the plan that's been leaked will also have dramatic impact on cable least if I understand its intent. The FCC will propose a new type of set-top box that will provide equal access to cable and Internet programming. The FCC tried to open up the set-top box business several years ago when it required cable operators to provide customers with CableCARDs (conditional access/tuner devices) that could be inserted into set-top boxes and HDTVs from consumer electronics companies. The cable industry fought implementation of CableCARD tooth and nail, and even today, most CableCARDs don'y allow subscribers to access pay-per-view and other two-way services. As a result, the entire CableCARD program was stillborn, and cable operators continue to equip their customers with tens of millions of proprietary set-top boxes.

On Wednesday, the FCC is likely going to propose that CableCARD be swept aside and replaced with software-based set-top boxes, HDTVs, home theater PCs and other devices that can provide customer authentication, decryption and tuning for digital cable systems without proprietary hardware. These devices will also have Internet connectivity, and will be able to provide access to Internet video in the same device and using the same user interface (interactive program guide) as cable channels. In essence, these new devices would elevate Internet video to the same level as cable channels.

I'm now diving into wild speculation, but here's what I think the FCC will also propose: These new set-top boxes and compatible devices could be purchased by consumers and used on any digital cable system. That means that consumers could move from area to area and use the same set-top box. They would no longer have to pay any monthly equipment leasing charges to cable operators, since the boxes would be configured and made compatible with different cable systems via software and firmware changes.

I know that all of this was supposed to happen with CableCARD and didn't, so why would it happen with this new scheme? It might not--the cable industry will fight it ferociously, especially the part where they have to give equal access to Internet video programming suppliers. The advocates for an open approach have nowhere near the political clout as the cable operators and broadcasters who are going to fight the Broadband Plan. However, the time has come for "soft" cable set-top boxes; the capability to do just about everything they need to do in software has long been there, and the cost of the processing power and memory they need is very low, especially compared to when CableCARD was first proposed.

Set-top boxes that don't require a truck roll in order to install, can be provisioned by consumers and can be upgraded and reconfigured in software would save an enormous amount of money for cable operators. Companies like TiVo and Arris could make a real business out of selling consumer set-top boxes. Any Blu-Ray player with an Internet interface and the horsepower to support Internet video applications could readily be adapted to become one of these new set-top boxes. In the long run, a software-based open design makes more sense for everyone.

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Saturday, March 13, 2010

First-day iPad sales estimated at 120K units

According to FORTUNE Magazine and the AAPL Sanity Board at Investor Village, Apple sold 120,000 iPads through the online Apple Store yesterday. This is obviously an estimate (since Apple hasn't released numbers) and doesn't count orders placed by shoppers in person at Apple's physical locations. It also doesn't count corporate and institutional sales (which, given Apple's aggressive educational pricing, rumored to be $230 for the 16GB WiFi iPad, are likely to be substantial.) Given that somewhere between 300,000 and one million iPads are expected to be ready for shipment by the end of the month, it's likely that there will be a sell-out, at least for the month of April.

First-day sales (especially pre-sales) should never be used as an estimate of long-term sales potential, especially with a company like Apple that has a big community of dedicated users. However, what surprises me is the number of people who have written articles and blog posts questioning the iPad that are turning around and buying them. I thought that there would be more price resistance, and I'll be very interested to see the distribution of sales for the three memory capacities and WiFi vs. 3G. The survey that the AAPL Sanity Board did on the distribution of orders by model covered only 99 orders for 110 units and is too small to be representative.

In any event, there are a lot of people at Apple who are very happy right now.
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Friday, March 12, 2010

Why the term "Exit Strategy" should be kicked to the curb

Mark Suster, a respected Los Angeles-based VC, has been taking a lot of flak for a blog post he wrote suggesting that the saying "fail fast" should be discarded. Many people took Suster's comments as a rebuke of Lean Startup principles, but they were in fact highly supportive of Agile and Lean concepts. Suster was targeting entrepreneurs who use "fail fast" as an excuse to fail using someone else's money: "If at first you don't succeed, quit and make someone else pay for it."

Recognizing that misery loves company, I want to take on another popular phrase that should be kicked to the curb: "Exit strategy", specifically when it's used in the following sentence: "What's your exit strategy?"

If a company is successful, there are lots of possible exit strategies:
  • Sell the company to a bigger acquirer for a lot of money
  • Merge with another company
  • Go IPO
You can also continue to run the company successfully and grow from internal growth, or acquire other companies.  A successful company doesn't have to worry about exit strategies.

An unsuccessful company, on the other hand, needs to worry about exit strategies a lot. The options for an unsuccessful company include:
  • Selling the company, usually for a fraction of the amount put in by investors
  • Liquidating the assets of the company in the hope that something (a product, patents, etc) will fetch a good price
  • Using available cash reserves to pay off creditors and shut the company down
  • Going bankrupt
None of those are appealing options.

Moreover, the startups that are asked about their exit strategies are usually the ones at an early enough stage of their development that it's impossible to say what an appropriate exit strategy should be. So, the founders or managers make up an exit strategy that they think VCs will want to hear. If the IPO market is vibrant, that will be the first choice; in a period like today where few IPOs are launched, they'll emphasize acquisition or merger.

The appropriate question isn't "What's your exit strategy?", it's "What's your business model?" and "How will you make this into a successful business?". The answer to those questions will determine whether the startup will even get to the point where a positive exit strategy is possible.
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Thursday, March 11, 2010

The Chicago startup scene is starting to take off

I attended an event in downtown Chicago tonight called MidVentures25, a presentation and competition for 25 startups from Chicago and other parts of the Midwest. One company that participated came all the way from Athens, GA. The event was very well-organized and equally well-attended. The organizers took over 22,000 square feet of "see-through" space in an office building across from the Willis (Sears) Tower for the night.

Each of the startups had a separate display area, much like a trade show.  The judges (drawn from companies such as Groupon and Google, as well as VCs and local entrepreneurs) visited all 25 tables, got demonstrations and then chose their five favorite startups to present in the final round. The winner got $16,000 in cash, goods and services. UPDATE: One thing that I forgot to mention when I wrote this post last night is that the startups didn't have to pay a dime to enter the competition or for exhibit space at the event. The event organizers and sponsors picked up all the costs. The TechCrunch50 was the first major startup competition that chose not to charge the selected startups. MidVentures25 has picked up on that trend, and I hope that it becomes the rule, not the exception, in startup competitions in the future.

What's so exciting about this is that Chicago is starting to feel like a viable place to base a startup. There still isn't much of a VC community in Chicago; I'd like to see a "Sand Hill Road East" spring up somewhere in the city, even if it's only remote offices for a handful of VCs from Silicon Valley, New York and Boston. As I've written before, just about everything needed for a vital venture community is here, and the costs of operation are very low compared to Silicon Valley, New York and even Boston.

Tonight's turnout indicates that there's a lot of interest in startups, even though the local culture hasn't exactly been supportive of the startup mindset. Three new incubators recently opened in Chicago, so there will be more opportunities for entrepreneurs to pursue their dreams.
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A la carte and the law of unintended consequences

If you live in the New York metropolitan area, you were a pawn in a high-stakes game of "chicken" between Cablevision and Disney, with the Academy Awards telecast as the prize. The issue was how much Cablevision would pay Disney to retransmit ABC's broadcast stations. After the Academy Awards had been going on for 15 minutes, Cablevision and Disney finally came to an agreement.

Now, the cable and satellite companies want the FCC to outlaw broadcasters from withholding their programming and force both parties to accept arbitration. Broadcasters, who have no small amount of political clout and influence at the FCC, argue that consumers have multiple ways of getting their programming, including over-the-air at no cost. If they can't withhold their programming, they'll have almost no bargaining power with service providers.

The service providers are using these retransmission fees as a reason for raising their rates to consumers, which is causing a customer backlash. Even worse, viewers are once again viewing service providers as unreliable. The cable industry has worked for more than a decade to overcome its reputation for unreliability and poor customer service. Now that most of the major service providers seem to have their acts together, program suppliers are pulling channels at a moment's notice. Planning to watch the Academy Awards tonight? Better get that antenna out. Want to make sure you see the Super Bowl? Good luck if the network that carries it is in negotiations with your service provider.

One likely outcome, and one that neither the service providers nor the program suppliers want, is to force the service providers to make channels available a la carte. In an a la carte world, the service providers would pay the program suppliers only for the channels that its customers subscribe to, and in direct proportion to how many subscribe to each channel. Presumably, the program suppliers would set a wholesale price per subscriber, and service providers could mark that price up or down.

Service providers hate a la carte because it will almost certainly decrease their revenues. Customers will be able to trade off fixed packages and a la carte selections, and go with the cheapest option. Tiered pricing plans will be wrecked, since customers will be able to build their own packages.

Program suppliers are scared to death of a la carte for several reasons: First, they'll no long be able to charge service providers for all of their subscribers; they'll only be able to charge for the customers who actually subscribe to their channels. That will result in dramatic revenue drops for many, if not most, channels. Second, advertising-supported channels will no longer be able to represent all the subscribers to a service provider as "potential" viewers; they will only be able to list the actual number of subscribers in a given period. Which would you rather tell advertisers: We've got coverage in 60 million households in the U.S., or 2.5 million households have actually subscribed to watch our channel?

The final, and perhaps scariest, outcome of a la carte for program suppliers is that the service providers may cut back on their channel lineups to just the most popular and profitable channels. Unpopular channels that have been carried so that service providers can support a wide variety of interests may be dropped.

As brinksmanship between service providers and program suppliers becomes a way of life, consumers will increasingly look for alternative sources of programming. If they can't control how much service providers are willing to pay for channels, and are thus constantly at risk of missing shows they want to watch, they'll demand the right to select and pay for channels themselves. If the service providers and program suppliers don't agree, they'll find other ways to get the programs or other things to do with their time. This game-playing has to stop.

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