Carpadium Consulting

Today’s Sydney Morning Herald has an article about how Murdoch’s The Times in the UK will start charging web readers for news. You can see the (amusingly headlined) article here: Times are a-chargin’ for web browsers.

Along with many, many, (many!) other commentators, I’ve blogged about this topic before.

Apart form the beautiful irony [2] in this article from the Herald, I am pretty sure that this whole paywall argument is a dead-end for newspapers. Why? Because readers have never really paid for news. It’s the advertisers that pay. I could be wrong, but trying to make readers pay for something that can quite easily get elsewhere for free seems crazy.

The problem that newspapers face is not that readers (or aggregators) are stealing content, its that the business model upon which 20th Century newspaper journalism is based has collapsed. Advertisers chase eyeballs, and have simply followed the punters online. Not to mention the fact that their other major revenue stream – classifieds – has also left the building.

This is good and bad. If newspapers can’t generate revenue at their traditional scales, then neither will they be able to generate quality news. This will create opportunities for others (eg ABC) but it will almost certainly see a shake-up in the business of news making. And to be perfectly honest, it really does need a bit of a shake-up given the quality of “news” in some of the major dailies around this part of the world.

The underlying effect at work here is what I refer to as “the end of distribution”, which I blogged about some time back. The fact is that traditional newspapers assume their businesses are a scale play founded on the distribution of physical newspapers. The Internet removes distribution as a factor, and so almost self-evidently, traditional newspapers must struggle as their founding assumptions crumble.

Unless of course, they can change. But charging your readers for something that they have essentially always taken for free [3] when those who really pay your bills are running away seems like a pretty dumb idea.

M@

[1] If you want a really insightful analysis of this whole debate (without the vested newspaper interests) check out Mike Masnik’s blog: TechDirt. It’s a fantastic read.

[2] If it’s not obvious, the clear irony is that we have one newspaper (SMH) reporting on a story in another newspaper (The Times). There is little difference between this and what bloggers and other web commentators do on a regular basis, yet it is precisely the kind of thing that newspaper publishers call “stealing”, and then put forth as the motivation for establishing their paywalls.

[3] Or at the very least, heavily subsidised.

I was reading a piece linked from DaringFireball yesterday and something really leapt out at me. Check out these two quotes pulled from the linked article, one from Tim Cook, Apple’s COO, and the other from Steve Ballmer, Microsoft’s CEO.

Here’s Cook’s quote:

“Windows 7, from our point of view, is just another opportunity to remind everyone to switch to a Mac,” said Apple Chief Operating Officer Tim Cook. “People are sick of all the headaches that go along with Windows.”

And here’s Ballmer’s quote:

“Let’s face it, the Internet was designed for the PC. The Internet is not designed for the iPhone,” Ballmer said. “That’s why they’ve got 75,000 applications — they’re all trying to make the Internet look decent on the iPhone.”

I really don’t understand Ballmer’s point. Leaving aside for a moment that there are 2 errors of fact and an irrelevance in the space of 3 sentences – what is he trying to say? It just does not make any sense. It even has an air of the Chewbacca Defence about it. Just what is their message? I have noticed this coming up again and again in recent Microsoft comments and not just from Ballmer. I guess if the message is confused at the highest levels, it’s difficult to see how it can get any clearer down the chain.

On the other hand, the message from Cook could not be clearer. And not only is it clear, but it’s said in a completely positive way. It’s a brilliant piece of communications that uses Microsoft’s own weight against it. It’s 31 words without a skerrick of weasel. It’s a piece of PR jujitsu.

M@

It appears like NAB is continuing to put downwards pressure on fees, with the recent announcement that it will further lower fees on accounts and card products.

Along with earlier announcements by NAB and others, this is all very welcome news. However, you can start to get a sense of the scale of the fee regime here in Australia when we see one of the big banks foregoing an alleged $110 million per year in revenue at what has routinely been called the worst financial crisis for a generation. Quite clearly, things are not so bad that they can’t afford to take a lazy $110m of the bottom line.

Now that this fee reduction program has really kicked off in earnest with the major banks, you are starting to hear them using “low fees” language in their communications, so it is obviously something that is resonating with consumers. There is still quite a long way to go, but it certainly seems like things are moving in the right direction. Unfortunately, there has not been much movement on fees and charges for businesses – a fact that is just now starting to get some public attention.

I imagine that we will see all of the Big 4 come more or less into line over the next 6 months or so on fees for retail customers. It remains an open question if any one of them will blink and start reducing fees for business customers.

M@

The Australian is reporting that CBA is in the process of rolling out contactless payments, apparently with a view to shortening the lines for pie and chips and your next footy match.

I think this is a good move, because I believe that it can have a real impact on the way people make purchases. If you can cut down the time it takes to make a payment, then you can obviously cut down the time taken waiting in line. This will obviously be really good at the big venue scenario, where you often have to wait a very long time in huge queues.

However, there is another angle where it could be very useful: public transport. There has been a long running effort to try to roll out a stored value transport card system here in NSW. This is similar to existing systems around the world, with the exception that our Government has not been able to make it work as yet. Perhaps an alternative to building a new stored value system specifically for transport would be to make use of one of these emerging contactless payments mechanisms? If done properly, this would obviate the need for a dedicated stored value card system altogether.

It will also be interesting to see how the fees and charges work. In the past, this is something that the banks would have placed a whole bunch of new fees onto from the outset, but my sense is that there is a bit more competitive tension these days between the Big4 banks on fees, so I’m guessing that there will not be too many (at least in the short term).

M@

I just spent a few minutes answering an Apple email survey, and it contained a very interesting question.

It asked me if I would be interested in “cloud based business applications including hosted email, CRM, accounting and storage solutions”.

I wonder what they are up to? I guess it could explain this, this and this.

M@

John Gruber from DaringFireball has great article today about the way business models are changing for newspapers. This is something that I have been following very closely recently because I have some good friends who work in the media business, and we have been having an ongoing conversation about this exact topic over the last year or so.

In the article, Gruber describes his own one-man-show, DaringFireball, an operation “where nearly every employee is working on producing actual content”. I think that what he describes here is the inevitable consequence of the end of distribution. When distribution is free, then there is simply no need for whole layers of business operation that have been required in the past. I’m also reading Chris Anderson’s Free right now, which is not a bad read, but I get the same sense as Gruber: some of it feels so obvious, that it’s a little hard to get excited. However, I suspect that the real point is that so much of it is not obvious to the likes of our current generation of newspaper publishers, in particular, Fairfax’s John Hartigan et al.

Newspapers are a great example of this principle: you need to manufacture a wad of paper to hold the news, and you need to manufacture a significantly large wad of paper to make the production economics work. Then if you want to chase more profits, you have to grow, grow, grow to extract scale efficiencies from the various production processes. However, when someone comes along and starts competing against you who does not have these same production burdens, you end up in an entirely different economic battle. One that it is difficult to see the traditional players winning.

I think it’s fascinating how this trend has played out in music, and now newspapers, and I can see it being repeated in books (if it is not already occurring) and also in television and movies over time. One of things that distinguishes these different forms of media is the cost of production and distribution. Arguably, music is the cheapest and easiest to produce (ignoring quality), and so it was first to experience the disintermediating effects of the end of distribution. You could probably also argue that the large music businesses added the least value for consumers, and so ended up being the low hanging fruit of the disintermediating effects of this process.

Newspapers are clearly next. They have taken slightly longer to fall victim than music because whereas music is subjective and personal, news is more expensive to create because it is (supposed to be) objective and correct. This takes time and research to get right. And although we could argue about their relative values, it’s not hard to make the case that news is more expensive than music to produce and distribute. For evidence, look no further than less advanced cultures who make music in abundance, but do not have the resources to create news, at least in the Fourth Estate form that the Western world is used to.

Television and film will follow. I hear all of the same arguments being made today about why this will never happen. In the end, all of the reasons seem to boil down to the same thing: it’s too expensive to produce and distribute. Well, that was true for music and newspapers not too long ago as well, and the end of distribution for them is already upon us. Television and movies are expensive to produce and distribute today, but my strong belief is that precisely the same pressures that have been brought to bear on music and newspapers will also be brought to bear on television and movies. Perhaps not this year or next, but it will happen over the next 5 years or so. YouTube is an obvious example (quality issues aside) but take a look at something like Vimeo, which specialises in hosting very high quality content, and I think you will see in it, at least some of the future of visual media.

Books are probably the odd one out in my list because they have a fascinating dual quality: they are of course the written words they contain, but they are also objects of beauty in and of themselves. People have books just for the sake of having them (I do this!) because there’s something really special about a book. People used to do this with vinyl records, but it’s not done so much with CDs, and not at all with digital music. Interestingly, vinyl is having a resurgence (a friend of mine just bought a USB turntable!) and I would argue that at least some of that resurgence is due to the collectability of vinyl albums.

In economic terms, what is really going on with the end of distribution is that we are seeing a massive increase in efficiency – an efficiency discontinuity. This occurred with agriculture at the turn of the last Century. It happened (and is still happening) with information right now. And here’s a way-out prediction for free: next in line is an efficiency discontinuity in manufacturing. However, this first requires humans to invent nano-technology based desktop manufacturing, which although still sci-fi today, it is certainly on the horizon for my lifetime (I hope).

As Gruber points out, his business has a single person working in it, and there is no room for anything other than highly efficient content generation. Businesses of this type simply cannot support the magnitude of operation of existing news organisations. I think that the ultimate outcome will be a complete reboot of the underlying business model for the entire Fourth Estate. DaringFireball, Crikey and The Eureka Report are great examples of what the new model will look like. Unfortunately, Fairfax is an example of the old model. And I think it has already been checked in for palliative care.

Although I am probably out on a limb, movies and television are equally susceptible to these pressures. Since the end of the Studio Era in film we have seen a reversal of the power structures in Hollywood to the point where a very small number of Stars are paid excessively large (and increasingly larger, it would seem) amounts of money, often without regard for the profits generated by, or the the quality of, the products they are making. This model is unsustainable in the long term, because someone or something will come along and radically change the cost base in precisely the same way that they changed the cost base for newspapers and music: by effectively eliminating the costs of distribution. As soon as scale becomes an unnecessary component of the operating model, it becomes increasingly difficult to sustain large production and distribution costs.

Who knows, perhaps the future of acting is on stage, where actors make YouTube or Vimeo versions of their live performances, and publish them on their own web site, complete with notes and background information on their interpretation of the role. They might even sell T-shirts to subsidise the costs of the performance! This sounds cartoonish, but apart from a very small number of uber-successful music performers who make money through recording contracts, this is the way the vast majority of musicians make money today. They perform live in front of an audience that either pays the band for a ticket, or the venue for their drinks which subsidise the band, as well as by selling merchandise directly to them either at the show or over the Internet.

If you go back into history, this was precisely how artists made their way – by going on tour and getting directly in front of their audiences night after night. If journalists and actors are to continue to be relevant, then they are going to have to get a lot closer to their respective audiences because distribution is disappearing. Unfortunately, this leaves very little room for anyone not directly involved in producing or consuming content.

M@

BTW: if it wasn’t obvious, the end of distribution is really only about the end of distribution for digital goods. As populations grow and environments deteriorate, it will become increasingly difficult to produce enough good quality food and collect clean drinking water for peoples’ requirements. We will also – at some point this is inevitable, even if it occurs too late – have to integrate the true cost of carbon into the production and distribution of food. For example, transport costs will rise, making local production of food the only economic alternative. The consequence of these trends over the next 20 years or so is that there will be a renewed focus on localised food production, and the places that can produce good quality food will be in a position to reap the rewards as prices rise.

Update 2: 21-July-2009: TechDirt is also pushing the boundaries of the new media business model. Check out the CwF+RtB=Business Model post. A brilliant analysis.

Update 1: 21-July-2009 – Here’s a follow-up by John Gruber on yesterday’s piece on newspaper business models. Interestingly, the article that Gruber references (by Mark Bernstein) agrees with his conclusion that newspapers are big, but disagrees with the premise that they are bloated because of management bureaucracy, rather suggesting that newspapers are big because of technology and distribution. Precisely! And if distribution has changed to the point where it is now essentially free, then there’s a whole lot of fat that can come out of these existing businesses, or perhaps more likely, a whole lot of lunch to be eaten by businesses that just don’t have these costs in the first place.

I have made several comments about Windows Mobile over the last 12 months or so. As anyone who has read those would know, I really think its the laggard in terms of mobile operating systems (at least ones that are actively being developed).

Today there has been some interesting chatter about a bond issue by Microsoft to the tune of US$3.5b, which some have seen as a little odd given that they have about US$25b in cash.

I like the SmartMoney suggestion that it could be a way for Microsoft to test the mechanics of the bond market, to get familiar with it and allow the market to become familiar with Microsoft. This kind of makes sense if you have something planned that would require a big chunk of debt down the track, but equally, that amount of money might be all they need for something specific. Its this kind of speculation that has led people to wonder what Microsoft is really up to.

Perhaps we can tie some of these recent events together?

Over 12 moths ago, Microsoft purchased Danger. I’m surprised this didn’t get more attention at the time than it did, but it has always stuck in the back of my mind as an interesting move, particularly given public commitments to Windows Mobile. My suspicion is that Microsoft was far more interested in the hardware than the software, and I suspect we are about to see the next phase of a big, new platform play by the Redmond Giant, but more on that later.

More recently, Oracle purchased Sun. This surprised me enormously at the time, but listening to the subsequent commentary, it seems like there is a very clear plan for Oracle to try to build an end-to-end model, not dissimilar to Apple. With Sun, they get hardware and an operating system, plus a huge (and profitable) storage business. This play makes a lot of sense if you can pull it off, and one thing Oracle has been doing pretty well lately is acquisitions. All up, this sounds like Steve and Larry got together over a beer and had the “own the whole widget” conversation.

You could argue that Sunacle makes things interesting for IBM, but I think it definitely makes things interesting for Microsoft. Oracle can now go in and provide a whole-widget enterprise stack from the storage and hardware layer, right up through the middleware and into the application. It’s a good story for Oracle, but the consequence for Microsoft is that it ends up with a tough job trying to sell Windows Server into the mix. It’s just not necessary anymore.

So back to the platform. Like I’ve said in the past, dominance comes from building a platform, not just having a good product.

We’ve seen it with Windows, where Microsoft owned the content (Windows and Office), while at the same time commoditising the endpoint (the PC business) and stitching up distribution by tying the sale of Windows and Office to the sale of new machines. All up, it was brilliantly commercially successful.

More recently, we’ve seen Apple build an amazing platform around the iPod and iPhone (endpoints), iTunes Music Store and App Store (distribution), and via deals with record labels to sell digital music (content). It’s been an amazingly successful strategy, both commercially and technically, as many would argue. In fact, it’s been so successful that it seems to have changed the game not just for the mobile business, but for the PC business as well.

I think we’re already starting to see the platform play from Oracle. They certainly have the pieces now: servers and storage (endpoints), vertical and horizontal applications in a ever widening number of domains (content), and one of the best sales forces in the technology industry (distribution). It all fits.

When you add these together, you can pretty quickly start to see why Microsoft is worried. They already lost the race in mobile, were never in it in portable media, chase 3rd place in gaming, and although the jury is still out, there’s a huge opportunity for them to fall out of the race in the enterprise stack. This really only leaves them with the desktop, and unless Windows 7 rocks everyone’s world to the point of psychosis, Windows XP might end up being the last successful thing Redmond ever does.

Which leads me to ponder if Ballmer is about to try something radical.

Ballmer needs a win, because not a lot has gone right lately, either strategically or with mindshare. They failed to make the Yahoo takeover work, the Zune seems to keep sucking no matter what they do, and not much more can be said about how totally lacking in awesome is Vista.

About the only thing that they have been good at (and exceedingly so) is making bucket loads of cash. Which has to say something about the competitive position of the Windows franchise with respect to the rest of the market. Very few organisations get the opportunity to stuff up like this, and still have the trucks backing up to their offices dumping cash. But that’s another topic altogether.

So if Microsoft is getting ready for a big move, what could it be?

Here are some absolutely crazy, it’ll-never-happen prognostications that might explain why a company with US$25b in cash is out borrowing money at a 95 basis point premium to the Fed rate:

1. Microsoft to buy RIM?

Of the three ideas, this is the one that makes the most sense, and its the one touted around by the commetariat today. There is a very strong technical tie in between the Blackberry platform and the Microsoft messaging platforms, so it is a very good fit. The problem here is would RIM shareholders sell out? I’m not sure. I think it makes a lot of sense for Microsoft because they would have a strong mobile platform, with huge enterprise penetration that would be a very credible competitor to the iPhone. I don’t know if RIM would play, and I don’t know if a hostile takeover of this scale could really work.

2. Microsoft to buy Dell?

I know this sounds crazy, but consider this: Dell’s share price is depressed ($11.21 as I write this) a price not seen since the last century. It’s currently valued at about US$21b or so, which would be easily digestible by Microsoft, presumably with a combination of stock and cash, some of which it would source from debt if today’s bond activities are anything to go by.

But it’s not just the price. This is a classic Microsoft emulation move. There’s nothing original in the idea, but its so ingrained in Microsoft’s DNA to watch what is going on elsewhere and first try to suppress it, and if that doesn’t work, just copy it. They might be seduced into thinking that it too can own the whole widget and start making hardware in addition to software.

I am not really seriously suggesting that this is going to happen, but it just has that ring of craziness about it that so often surrounds massive corporate deals done by organisations prospecting for a clue. I can see Redmond understanding how to do this, and I can see some Dell shareholders liking the opportunity to exist at a premium to today’s price. I’m not sure that Michael Dell would agree, and regardless of what Microsoft might think, I’m not sure that the market would think that this is a good idea. So let’s see.

3. Microsoft to buy Palm?

This idea also sounds totally crazy, but let’s consider for a moment that Palm really has done something amazing with the Pre. Early reports are certainly promising, and let’s face it, they outdid Apple once before – the original Palm blew the Newton out of the water (commercially) back in the day. Of course, things are very different now, but there can be no denying that Palm has the kind of corporate DNA that allows it to successfully innovate.

The other point to conemplate with Palm is how or why they managed to get such a big chunk of cash recently from Elevation Partners. Could this be because there is a quick exit on the cards for Elevation in selling out to Microsoft?

This deal doesn’t have the enterprise elegance of the RIM alternative, but Palm has built  Windows Mobile devices before, and it also knows how to make a smartphone, thanks to its experience with the various Treo lines. It’s also a whole lot cheaper, with a valuation as I write this of about US$1.5b.

If Microsoft went in with a healthy premium, that $3.5b in debt they picked up over the last couple of days would fit nicely. On recent form, any one of these options is going to be far more intresting than the Zune Phone.

M@

Update 2010-Feb-12: Kara Swisher has some more thoughts on the idea of a RIM purchase.

There is a crazy amount of speculation at the moment that Apple will release a new kind of device sometime this year, or at least announce one, possibly at WWDC in June.

If you believe the official line from Apple, this thing won’t be a Mac and it won’t be netbook – at least as they are currently defined – because Apple believes that it cannot make a decent quality product at that US$300 or so price point.

So let’s have a think about what is compelling about the current crop of netbooks. Obviously form factor is a hit with people who want to be ultra mobile. But from my experience with the animal in the wild (which is little more than having a heft of one in a PC store) the extremely small form factor is as much a curse as it is a blessing. They are obviously great for doing really simple stuff like reading your daily blogroll, posting a few tweets, or checking e-mail, but I’m pretty sure that the next Great Novel will not be tapped out on a netbook.

Price is also a huge factor. The pricepoints of netbooks (even here in Australia, where we tend to pay a premium for most hardware) are pretty good. For example, you can get one of these for about A$600 or A$700 or so. There are better deals, that was just the first one that came up in a Google search. That is quite a bit less than what you would pay for a full featured laptop, and rightly so, because netbooks are relatively underpowered compared to something like this.

So, what if rather than trying to scale down a Mac into a netbook, Apple scaled up an iPhone into the category?

I would like to propose a name for this new type of device: The Phonebook.

That’s phonebook, as in:

Netbook + iPhone = Phonebook

What would set the phonebook apart from a normal netbook? The first thing is that the phonebook has a slot for you to plug in a SIM card. Apple obviously has all of the hardware and sofware IP required to make a phone, so it would seem pretty straightforward for them to pull this together.

This has two benefits. Firstly, it gives the device an edge against the current crop of netbooks that need a WiFi access point, or some kind of external 3G hardware. But perhaps more importantly, it gives them a way to manage the pricepoint. Sold with an appropraite 3G broadband contract, these devices could be given away for free, just like most iPhones are sold now. This makes the entry price very competitive when compared to other netbooks.

There is also a further opportunity to solve one of the problems of the current generation of netbooks: the keyboard.

If you recall, Apple’s solution to the problem of fiddly keyboards on mobile phones was to throw it away alltogether.The same approach is possible with the phonebook: get rid of the keyboard and just go with the same kind of touchscreen technology that exists in the iPhone.

This would be obvious, but Apple rarely just does the obvious when it comes to innovation. So I was thinking about the possible size of such a phonebook, and it struck me that you might want to hold it with two hands, kind of like a book held sideways.

Compare this to the way that I (and many people) hold an iPhone, which tends to be in the right hand, with the right thumb doing most of the work, and the left hand coming to the rescue on occasion (or vice-versa for the sinister among us).

And with this tablet-like-a-book image in my head, I was reminded of a previous Apple patent application that described a mechanism that used the back of the device, rather than the front, for input.

The patent suggested that in touch-controlled devices of a certain size, the user’s hand and arm tended to get in the way of the user interface as it was being used. The solution was to make the back of the device touch sensitive (I am not sure how this would work), so that whilst one hand held the device, the other hand could control it by touch from underneath. Here’s a link to an article discussing the patent.

So, on reflection, what I think we’ll see is a device that is far more iPhone than it is Mac, but it will be something arund the size of the Kindle. For example, I think this is probably as good a guess at what it will look like as you will find.

In addition to that design, I think it will have phone capabilities, and I would really like to see it make use of the back-of-the-device touch patent. Here’s an idea: perhaps the device could have a cover, the inside of which was touch sensitive. When the cover folds around to the back of the device, it works as touch panel. That could work.

M@

Update 1: Looks like some of this might be on the cards. Here’s a little bit of extra rumory goodness (via 9to5mac) that suggests the next MacBook hardware rev might contain builtin 3G wireless.

So, pretty much everyone got this one wrong!

There’s a lot being said about this Oracle/Sun merger right now, but there’s three interesting things that stand out for me in the deal.

Firstly, when was the last time a software company bought a hardware company? At least on this scale. I know Sun is not exclusively a hardware company, but it’s certainly their pedigree. And Oracle is definitely a software company. If you wanted an analogy (apart from the scale) it’s a bit like Microsoft buying IBM. I wonder how the culture of the two organisations will mesh? I can definitely see some friction between the sales-led Oracle and the engineering-led Sun over the next couple of years.

And the second thing is: what happens to Java? I really am surprised that IBM let this one go. Let’s face it, Java is the new COBOL (or will be) and that means that the future of IBM is so heavily intertwined with the future of Java, that I am amazed that IBM did not have another crack at this deal. I can anticipate some tension here if Oracle takes Java down a path that in any way closes off IBM’s options. Perhaps we’ll see a fork? What do you call coffee in Armonk?

Finally, I wonder if Sun considered a break-up of some sort where IBM got Java, Oracle got MySQL and someone else (Cisco perhaps?) ended up with the hardware business. In fact, there was even talk of an Apple angle for the storage business given the ZFS tie-in in Snow Leapord. I can see a good fit in each of those deals, and from a shareholder point of view, I wonder if you couldn’t come up with a set of numbers, say in the order of $3b in each case, such that Sun shareholders ended up better off than the $7b and change that they walk away with now.

Who knows.

M@

Update 2: This is some of the best commentary I have seen on this topic, from an insider.

Update 1: Apparently, Oracle sees Sun as a “software gem … ripe for cost cutting”. Ouch.

Here’s the next installment from the Crazy Naming Team at Microsoft:

! exploitable Crash Analyzer

The hilarious thing about this new name is that we are informed that it is pronounced “bang exploitable crash analyzer“. Excellent. That’s cleared a whole lot of stuff up for me.

As I have asked before, who is it that comes up with these names? Have they stood in front of a mirror and said it aloud to themselves so they can hear what it sounds like? Who knows the kind of karmic debt they are getting themselves into by naming a piece of software not exploitable!

M@