Archive for January, 2010

The strategic implications of iPad

January 28, 2010

Plenty of people are ooh-ing and aah-ing about the features of Apple’s new tablet, the iPad. A good summary is here, and a rundown of the minuses (that I pretty much agree with) is here (all via Gizmodo, including the picture above this post).

That’s all fine, but I’m more interested in the business strategy implications of the iPad (other than “it will kill netbooks!” “it will kill the Kindle!”). Here are the things that I find fascinating about what the iPad announcement tells us about Apple’s strategy:

  • Apple makes its own CPUs. This is huge! I can’t believe I’m the only one who is fixated on this. We all know Apple acquired semiconductor company PA Semi back in 2008. Everyone assumed that they would use them to design auxiliary power-saving chips for the iPhone, iPod Touch and other mobile devices. But Apple just came out with its own central processor. This is, to the best of my knowledge, the first time Apple has built its own CPU for a device, going way back to the original Mac’s Motorola 68000 (a stalwart of the history of computing!) It is also huge, of course, for Intel. Apple was sort of backed into choosing Intel to provide its CPUs as the G4 architecture kept sliding behind the PC’s x86 architecture. But Jobs knew all too well that couldn’t last. After all, Intel is exactly the same kind of company as Apple: big, secretive, extracting fat margins from its should-be-commodity products through superior engineering and savvy marketing, and most of all, never shy at playing rough. I’m pretty sure Steve Jobs stayed awake at night more than once at the thought of depending on Intel for the core of his products. Now that’s gone. Intel will still power Macs for the foreseeable future, but now Jobs has a whole new negotiating position with them. And of course, it begs the question: while Intel will probably always have a lead in high end processors, how long until Dell and HP buy small semiconductor manufacturers and do the same as Apple for their low power devices? This is potentially a seismic shift in how the personal computing industry functions.
  • Apple is now officially a media company. iTunes! Apps! Newspapers! Books! Movies! The original strategy with the iTunes Music Store was not to make money from it, but to use it as a “killer app” for the iPod, where the margins are, and also, of course, for lock-in. In fact, Apple has always been a hardware company using software to sell hardware. Apple makes very little to no money on software and cloud apps such as media stores. Is this changing? We all know how Apple at first rejected putting third-party apps on the iPhone and now is embracing the App Store. On the App Store, like on the iTunes store, Apple at first took a 30% cut expecting only to cover the cost of managing the store, but it is turning out that it is a huge business in its own right. Is Apple shifting to a strategy to making money on content delivery? Which leads us to…
  • The iPad is CHEAP. Jobs famously said that Apple didn’t know how to make a piece of consumer electronics under $500 that isn’t a “piece of junk,” and when analysts called Apple’s strategy into question (remember those times? It was a looooong time ago.) he called Apple’s strategy the “BMW strategy”: own the high end through superior engineering and marketing, and make money through fat margins, not big marketshare. The opposite of the Dell strategy, which is why Michael Dell and Steve Jobs openly despise each other, despite everything they have in common: they come at their markets through radically opposite points of view. The iPod was an outlier in that it was both as expensive as a BMW and as widespread as a Toyota, but overall, that was still Apple’s strategy. And now the iPad starts at $499. I’m pretty sure Apple gets fat margins on the upper-end models (there’s not much extra in there to justify the extra hundred dollars), but its margin is probably razor thin at the $499 price point, which is probably going to be the most popular. This is a huge gamble for Apple. First of all, because the iPad could cannibalize its other products where it gets fatter margins, making Apple a victim of its own success. Second of all, because this is a whole new strategy: going for dominance of a new segment instead of just the high end. In fact, I suspect (no way to be sure yet) it might herald Apple turning its strategy on its head: instead of using software as a “loss leader” to sell hardware, using hardware as a “loss leader” for selling digital MEDIA. Again, there’s no way to be sure yet that that’s what Apple is doing, but if this is it, it represents a huge shift in Apple’s strategy, its business and its culture.

Of course, I don’t have to say that if this is Apple’s strategy, and Apple succeeds, this would be bad for open standards and open media delivery. There’s nothing Apple loves more than locked down systems, and you can bet all that media Apple delivers is going to be chock-full of DRM. After all, it’s also the ultimate consumer lock-in. Once you’ve bought all those movies and TV shows on your iPad, you’re going to want to watch them on a big screen, and for that you’re going to have to buy one of those big screen iMacs.

These are interesting times indeed.

(I will now let you return to your originally scheduled iPad coverage: ohmigod it’s so pretty! It doesn’t multitask, Steve Jobs you killed my dreams!)

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thesixtyone is awesome

January 22, 2010

The other day I got a lot of attention for “bashing” Posterous, a Y Combinator company, for having in my view poorer design than its main competitor Tumblr, which is 4 times bigger according to Compete.com, and for saying that it’s because Tumblr is better designed that it is more popular. There was a lot of back and forth related to that post (for those keeping score, Paul Graham disagrees with me, John Gruber agrees), most of it interesting. I used this example to highlight two trends that I still believe are very much real:

  • today and increasingly for consumer web apps, design (not just how it looks, but also how it works) matters more than “raw” technology ;
  • New York is coming into its own as a hub for startups that care about design and produce great design, something which is often overlooked by Silicon Valley engineer-centric companies and a certain Silicon Valley engineer-centric mindset.

That being said, I never meant to imply, as some took me to mean, that nobody in Silicon Valley understands design, that there aren’t web startups with great design in Silicon Valley or, even more absurd, that Silicon Valley is not a tremendous startup hub. These are all ridiculously false propositions.

So today I want to give back to Cesar what belongs to Cesar and laud thesixtyone, a Palo Alto, Y Combinator company. The company started as a (not really well designed) “Digg for indie music” that helps indie musicians get discovered and make money. Their newest version, however, is a tremendous example of wonderful design.

First of all, as you can see above, it is absolutely drop-dead gorgeous. And unless I’m mistaken, they get this beautiful look through HTML5 and not Flash, so big kudos there.

And second of all, in the design-is-how-it-works category, they refined their mechanics away from simple Digg-like up-or-down voting to Foursquare-like game dynamics, where you get a limited number of “hearts” to hand out to bands and artists and are incentivized do things on the site to earn rewards.

It’s a great discovery system for new music. I’ve been using it for the past couple of days instead of the Hype Machine and Spotify and it is truly a great service (there are a couple of annoying UX kinks but I’m sure they’ll work them out).

So there. Of course there are Silicon Valley startups that understand great design, and thesixtyone is one of them. Now check them out and tell me what you think in the comments.

Steve, go big or go broke

January 21, 2010

Microsoft’s new strategy under chief software architect Ray Ozzie has been “three screens and the cloud,” the three screens being mobile, desktop and living room, and the cloud being Microsoft’s actual cloud infrastructure, Azure, and presumably the web, i.e. Bing, Hotmail, MSN and Microsoft’s other web properties.

How are these doing?

Obviously, Microsoft is still dominant on the desktop, and will remain so for a while now. Even though web apps are a long term threat to Microsoft’s desktop software, at the high end (Macs) and the low end (netbooks), right now they’re safe, because software can still do a lot of things the web can’t do, especially in the enterprise, where Google can’t get a foothold.

In the living room Microsoft has a very strong beachhead with the XBox, which is fast turning into a social multimedia entertainment center, which is how it should be.

In the cloud it’s too early to tell. Amazon is clearly the dominant player in cloud infrastructure, but it’s much too early to tell who will end up with the biggest slice of the pie, and Microsoft seems to be doing the right moves so far.

When it comes to mobile and web, though, Microsoft is foundering.

Bing is a strong effort, and has been picking up marketshare (largely through deals and not organic growth, though), and if and when Bing becomes Yahoo!’s search engine, that should give them enough scale to really refine their product. Microsoft’s search leader, Qi Lu, is a scarily talented executive. That being said, so far, it’s practically impossible for Bing to present a credible threat to Google search. It is marginally better in some respects, but in order for people to change their entrenched habits, you need more than marginally better. You need remarkably better. And Bing isn’t that, by a long shot.

Meanwhile, in mobile, it’s a disaster. Windows Mobile 7 is a long ways off. Even if it’s a tremendous product  — and while it will probably be better than previous efforts, it almost certainly won’t be as good as Android or OS X — mobile OSes are a platform game. To win in mobile, Microsoft needs tons and tons of apps — developers, developers, developers — and for that it is very, very late to the party. Plus, how does it make money from mobile? Apple makes money on hardware. Meanwhile, Android is free — in fact, less than free: Google offers revenue share on advertising revenue to mobile operators who use Android. Microsoft wants to charge Verizon to put Windows Mobile on its phone, meanwhile Google is paying them to use a  product that is so far superior, and by now proven.

My point is this: these are two crucial markets where Microsoft can’t win through incremental improvements. It must go big or go broke. In search, it must introduce a new paradigm — so far the most promising looks to be what Mahalo is doing. In mobile, some have recommended that Microsoft buy RIM. The two have tremendous synergies from their strength in the enterprise and BlackBerry’s software. That would be a start. In fact, they should also buy Palm, which is struggling in the market, but has better software and hardware and more apps.

I have a few ideas on how precisely Microsoft can win in search and mobile, but they’re beyond the scope of this post. The point here is: Microsoft must go big or go broke. The only thing they have left is their huge size. They should use it.

Carol, Tim and CEO hype

January 19, 2010

There’s no question that CEOs are a huge determinant of a company’s success. Founders obviously, but also hired CEOs like Jack Welch or Lou Gerstner. And because CEOs are so important (and visible), they tend to get hyped.

A good example of that are the CEOs of Yahoo! and AOL, Carol Bartz and Tim Armstrong. Both are in the same business (selling advertising), and both are taking the helm of companies that have a great past but are troubled, whose position in the market is eroding, and whose future is in question.

And each got a divergent reception in the media. After Jerry Yang’s hapless (mis)management of the stillborn Yahoo-Microsoft merger, Bartz was a woman (it helps), with a previous record of successfully turning around a large company, Autodesk, and obviously had great charm, with her folksy ways and occasional f-bombs. Everyone loved her, hailing her as Yahoo!’s savior.

Meanwhile, after Tim Armstrong left Google, where he was head of sales for North America, there were whispers that he was “just a salesman” (overlooking that he was a two-time entrepreneur before joining Google) of a product that sells itself, who ended up at the right place at the right time, and is too lightweight to really do anything with AOL.

And what’s happened so far?

Well, Carol Bartz’s made a few missteps, notably with her search outsourcing deal with Microsoft, which is so mindbogglingly complex as to be unworkable. Meanwhile Tim Armstrong’s made every right move, from setting out an ambitious (but doable) content-based strategy for AOL, to proceeding with layoffs quickly and humanely, to setting expectations right for AOL’s IPO, to building the new Seed platform, which is an innovative product with lots of potential. His only slip-up to my mind was the horrible AOL rebranding, but apparently (unlike Yahoo!’s similarly disastrous branding campaign) consumers like it. So even his screw-ups were wins.

Now don’t get me wrong — it’s way, way too soon to judge either of them as CEOs. The AOL turnaround is a huge gamble, and neither of them has been around for long.

But I still think it’s instructive to see how differently they were treated by the media, and how Bartz has had significant stumbles while Armstrong has so far been A+. Don’t believe the hype, I guess is my point. Especially not in the business press.

Why Tumblr is kicking Posterous’s ass

January 19, 2010

Tumblr and Posterous are the two most prominent “tumblogging” sites, i.e. sites that make blogging more straightforward by making it easier to post media. Both were launched within six months. (Actually, Posterous was started later than Tumblr.)

But now Tumblr has been an Alexa Top 100 site for a while and is still growing strong. Meanwhile Posterous has about 4 times less uniques. Yet Posterous has everything to win: it’s a Y Combinator company with top-tier investors like Chris Sacca and Mitch Kapor. Its founders are experienced software engineers with computer science degrees from Stanford. How come it’s eating dust from a small startup started by a high school dropout?

The answer is as easy as it is counter-intuitive: Tumblr is a New York company and Posterous is a Silicon Valley company.

Or, to put it another way: Posterous is an engineered product, while Tumblr is a designed product.

Posterous is extremely well engineered. There’s nothing wrong with it. Every single thing about it is well thought out. But it’s not just that it’s less pretty (though it is). It’s just not designed as well as Tumblr is.

Look at Tumblr’s landing page:

That’s it. Sign up is dead simple. Can you imagine the conversion rates they get out of that page? Moreover, they have one of the best taglines of any service: the easiest way to blog. What else is there to explain? They don’t brag about features like “like”, “reblog” or (ugh) “tumblarity.” Tumblr is the easiest way to blog. Anyone, your mother included, can understand that.

Meanwhile, look at Posterous.

Oh sure, it’s a nice landing page. But, “the dead simple way to post everything”? Sure, it sounds nice, but it’s hard to say what that really is. Is that like Facebook, where you can share all sorts of stuff (videos, links, pictures) with your friends? Is that like Twitter? Or is it like a blog. The “just email us” pun is nice, since all you need to do to sign up is to send an email, but to a distracted user it’s like “What? I have to email them to get an account?”. Then you read all the stuff after that. There’s so much stuff there! A step-by-step explanation, a “who’s it for” (if you have to explain, you’re not doing the right job), a bunch of links and pictures.

In fact, that sign-up-via-email feature: engineering feature. When Posterous came out, that was the thing that set it apart: it’s so simple you don’t need to sign up, just send something via email! Cool! Except — who really does that? Very long signups can discourage users, but if you have only a few forms to fill, is there a single person who wants to sign up for a service, can’t be bothered to fill out a three-item form, but by God, pulling up their email client, finding a picture or a video to post, attaching it, and emailing it to post@posterous.com (or is it new@posterous.com? posterous@posterous.com?), that’s easier! It’s exactly the kind of thing where an engineer thinks “Oh, nobody does that, I’ll do that, that’ll be cool!” but in real life it’s useless. I mean, posting by email is a nice feature. But it’s not a killer feature.

I will give 5-to-1 odds to anyone that Tumblr has higher conversion rates on their homepage than Posterous and 1-to-1 that they’re twice as high.

In fact, everything about Posterous is nice. It’s very nice. I’m not here to bash Posterous, I think it’s a tremendous product and I wish them the best of luck.

But everything about Tumblr is better designed. I used the landing page as one example, but there are tons of features where Tumblr shines by its gorgeous design.

Meanwhile Posterous is typical of the Silicon Valley engineering mindset where everything is measured, ranked, weighted. It’s like Google. And having terrible design like Google is great if you have a technology edge. But if you’re in a market where what matters is design edge, that’s not enough. There needs to be great design, by which I don’t mean looks (though they’re important), but how it works for the end user.

Meanwhile, Tumblr is typical of the new New York startups, that have great engineering talent, but care about design, UI and UX.

Again, I don’t mean to bash Posterous, but to me Tumblr and Posterous are just picture-perfect examples of two very important trends.

The first is that New York has truly come of age as a startup hub, with its own “style”, its own way of doing things, its own mindset, which can sometimes — not always, but sometimes — kick Silicon Valley’s ass.

The second is that for consumer web apps today, design matters more than technology. Much has been written about how the cloud, accessible web frameworks, etc. have dramatically lowered the cost of getting a startup to market, and that’s certainly true, but it also means that since everyone is on EC2 and Ruby on Rails, technology is no longer what differentiates most consumer web apps. What does is design. UI/UX design. Social design. Business model design as well (Groupon and Gilt Groupe, the two tremendous e-commerce success of the past two years, are in Chicago and New York respectively). To be sure, technology is and always will be very important. I don’t want to go back to the startup where the MBA bosses around engineers. And some of the best designers will be engineers (like David Karp, or Mark Zuckerberg). But you can’t just engineer anymore. You have to design.

Tumblr’s success shows that.

EDIT: It’s been pointed out to me in the (interesting) comments at Hacker News that Posterous has been growing faster than Tumblr. While that’s true, Posterous is growing from a smaller base and Tumblr is still much, much bigger, and their growth has barely slowed, so I think unless something unexpected happens, Tumblr is still going to maintain a strong lead over Posterous.

Curmudgeon is bitter he didn’t cash in sooner

January 15, 2010

Bo Peabody, the founder of Tripod (remember Tripod? I have an homage to it up there) and now a VC at Village Ventures (no, never heard of it either), wrote an op-ed in the Washington Post to say that social networks like Facebook and Twitter aren’t, and will never be profitable, that the advertising and freemium business models don’t work for social networks, and that it would be best to run social networks as non-profits, a la Wikipedia, rather than businesses, because it’s in the nature of social networks that they fail.

I’m all for contrarianism, but — leaving aside for a moment that the guys who started Facebook and Twitter probably wouldn’t have started them in the first place without the profit motive — Peabody’s argument would probably sound better if he hadn’t written this now.

Peabody writes that News Corp and AOL screwed up by acquiring MySpace and Bebo respectively; while AOL clearly overpaid (yes, technology is the only sector where boneheaded managers make stupid acquisitions), MySpace would’ve probably hit $1 billion in revenues in the year after it was acquired if it hadn’t been for the financial crisis, and kept growing like wildfire if the management at FOX Interactive hadn’t frozen product development while Facebook ate their lunch, stuck a finger in every pie, and generally made a mess of things. But more than all of that, what complicates Peabody’s thesis is that the two companies he holds up as exemplars of the impossibility to make social networking profitable, Facebook and Twitter, are… profitable.

Facebook has been profitable since last September and its revenues are growing rapidly. Twitter is now also profitable thanks to its licensing of its real-time search firehose to Google and Microsoft, and has left most other revenue sources untapped by choice, not inability. Saying that social networks can’t be profitable, and using Facebook and Twitter as examples of that, right after those two companies become profitable, probably isn’t the best way to make yourself look smart.

To grow, Boxee must embrace porn

January 14, 2010

Boxee, the social browser for your TV, has been making all the right moves lately, from its open API and app ecosystem, to the huge splash it made at CES, unveiling a sexy Boxee Box (to put some Boxee on your Boxee while you Boxee). Boxee can be a truly disruptive service, by disaggregating content from the pipelines that choke it. You search for shows, without caring if they’ve been made for TV or for the web, if they’re on networks or cable… This is both a tremendous opportunity and a really uphill climb, precisely because those content pipelines aren’t going to let themselves be commoditized so easily.

To be able to compete with them, Boxee needs tremendous user growth, and they’re not going to do that with a Flickr app and a nice-looking cube. The history of media teaches us that new media channels win thanks to one thing, and one thing only.

Yep. Porn.

Porn is what made VHS triumph over the superior Betamax format, porn is what made the DVD, and of course — don’t deny it — porn fueled most of the internet’s mass market adoption.

The best way for Boxee to grow like a weed and have a chance to take on Comcast and the rest is to become the best way to experience internet porn. It should take a page from software like Heatseek, the porn browser that makes it easy to search for porn, hide and clean your history, browse the many porn equivalents of YouTube and avoid ads and spyware (er, or so I’m told).

Using porn to boost your growth is a hallowed strategy, pursued by such reputable internet giants as Microsoft, with Bing’s video playback feature, and Google, with Chrome’s incognito mode (yeah, sure, it’s for shopping). Like Microsoft and Google, however, it’s important that while you make it clear to everyone that you’re optimizing for porn, you lie through your teeth about ever doing such a thing.

Make Boxee the best way to search, stream and watch internet porn in glorious full screen format, and user growth will explode. I’d certainly use it more often.

(My wife is so going to kill me when she reads this.)

Please give for Haiti

January 14, 2010

A injured child receives medical treatment after an earthquake in Port-au-Prince January 13, 2010. (REUTERS/Eduardo Munoz) Source: The Big Picture

Damn. Not two days go by and already I break my rules. This post isn’t about technology or entrepreneurship (there will be one forthcoming later today), but look at these pictures and read this first-hand account and tell me you can’t give.

To make this related to tech startups, Chris Anderson, the curator of the TED conference, is asking for ideas on how technology can help Haiti, and Tumblr has put up a page with links to the most prominent organizations you can donate to: click here.

And, last but not least, if it’s the sort of thing you do, please pray.

The meaning of Google VS China

January 13, 2010

Yesterday Twitter and the world was rocked by Google’s extraordinary announcement that a coordinated Chinese attack on their sites, and in particular the Gmail accounts of Chinese and Western human rights activists, had been the straw that broke the camel’s back, and that they’re now thinking about getting out of China entirely. This is huge, unprecedented news. No Western company has ever thrown down the gauntlet at the Chinese government.

Back when China — and US corporations including Google — were getting hammered over the Beijing Olympics, I already thought that Google should pull out of China, or at least threaten to do so, because they weren’t going to win there, and it wasn’t worth the cost, as well as the PR and government relations headaches. And who knows, maybe they did it privately. (See, this is why I opened this blog. Instead of saying I had an idea, which nobody will believe, I could point to an actual post.)

Anyway, there are basically two ways to look at Google’s move here:

  • Google cares about human rights, cares about its “don’t be evil” motto, thought it was doing more good than evil by participating in the opening up of China, but is now fed up by the government’s abuses.
  • Google is getting its ass kicked by Baidu all over the place — Baidu’s market share is 75-80% to Google’s 15-20% — and so they’re cutting their losses and dressing it up as concern for human rights for marketing purposes.

(There’s also a third way, which is that this is just an opening salvo of hardball negotiations about Google’s impediments in China. But I don’t think so. The Chinese government always, always calls bluffs (it even called Khrushchev’s nuclear bluffs). Furthermore, negotiations via PR might be great if you’re trying to fill a prime time slot, but in China they’re a big no no. Google has caused the Chinese government to lose face, which is a very, very big deal there. Of course I could be wrong, but I think Google is dead serious about leaving China.)

So which is right? The goody-two-shoes explanation or the cynical explanation?

Actually, it’s both.

It’s both, first of all because each explanation has as its core the same actor: the Chinese government. The Chinese government is behind the human rights abuses in China, obviously, but it’s also behind Baidu’s stunning success. Two things make Baidu so successful: it’s the best place to look for porn, and it’s the best place to look for pirated MP3s and movies. Both things are illegal in China, but the law is only enforced against Google (and Yahoo!). Furthermore, behind the Great Firewall of China, there is no net neutrality. The government decides whose servers go fast, and whose go to a crawl. (To be sure, Baidu also has a bigger sales force that is more adept at talking to Chinese SMEs who are big online advertisers, but something tells me having 80% market share and the government’s implicit backing doesn’t make their life harder.) So to sum up, the Chinese government’s repressiveness and Google’s failure in China aren’t two different issues — they’re two sides of the same coin.

Second, because this is obviously a decision that comes from the Triumvirate, and human beings don’t make decisions for clean-cut, rational decisions. I’m sure that Larry and Sergey believe in the “don’t be evil” motto, and genuinely believe they make the world a better place at Google (human beings are stunningly talented at convincing themselves than what’s in their best interests is morally desirable). They’re getting their asses hammered all over the press over their marketshare, over privacy, over their role in the collapse of old media, and they want to show to the world that they’re still good, damnit. And at the same time, they know that Google.cn is a huge money sink, a huge time sink, a PR nightmare, and they know they’re never going to crawl out of the hole . Unlike Google, Yahoo! has been spinelessly giving in to every Chinese government demand and has only done marginally better for it.

I would’ve thrown the towel as well.

After all, owning 5/6ths of the world ain’t all bad.

(P.S. Check out @wikileaks for the credible-conspiracy-theory angle to all this.)

Hello, world!

January 13, 2010


Reid Hoffman, the founder of LinkedIn, reportedly said that if you’re not slightly embarrassed by the first version of your product, you haven’t launched soon enough. In this spirit, welcome to pegontech.wordpress.com, a mundane address for what I fervently hope will be a thoughtful and original resource on technology, entrepreneurship and business in general.

My model for doing this are people like Chris Dixon and Fred Wilson who write smartly and daily about these issues, and have managed to create a true community around their blogs, which is obviously very important to me. Feel free to leave comments and email me at pegontech at gmail.

This is my umpteenth attempt at blogging seriously, so this time I will set my self clear, serious, actionable goals:

  • post every day;
  • keep my posts short and sweet;
  • keep my posts about startups, tech and business

Furthermore, I really intend to spruce up the place, with its own domain name, perhaps a custom theme, Disqus, and all that stuff. But it’s not what matters right now. What matters is to get started.

So, welcome! Subscribe to them thar RSS and Twitter and tell your friends.