Marketing Memos

Lock-in as a marketing strategy is alive, well, and unfortunately growing.

For dot-communists and those raised in the era of Linux, vendor lock-in is the art of keeping customers captive. By making people commit to a technology, and thus raising the pain of switching away from said technology, vendors cause customers to linger even when they do not want to. I know CIOs who for decades have blustered against Cognos and being locked into stiff annual license fees for PowerHouse, Cognos’ ancient 4GL.

Yet they pay the fee every year knowing that rewriting thousands of lines of PowerHouse code is pretty pricy too.

Another variation of vendor lock-in is commonly called upgrade robbery. I encountered such a scam this week when I noticed my ancient (circa 2003) smartphone buttons started to stick. In order to upgrade to a newer smartphone, AT&T insists that I buy $720 worth of wireless data that I do not need or want. My options are to switch carriers (who currently require the same data plans), or buy an unlocked phone for which AT&T may or may not automatically add a data plan for using. More maniacal still is that mandatory data plans are designed to condition cellular subscribers into using data services. Thus, at the end of a two year data engagement, the luxury of wireless data will have become and necessity.

Pretty pricy phones.

Amazon also has a bit of a lock-in with their popular Kindle ebook reader, though their version of lock-in is somewhat friendlier. The data format for Kindle books is proprietary, and Amazon is in no hurry to openly license the format to competing hardware makers. Buying an Amazon ebook means only owning Kindles for reading it, which if you are a typical bibliophile or literary pack rat means you have one and only one upgrade and replacement path – Amazon lock-in.

Pretty pricy e-paper.

Oddly, lock-in rarely lives long, with Cognos being an obvious exception. Customer lock-in is a strategy that invites competition, either with competing proprietary products, or more insidiously with open technology. Just ask Steve Balmer if Linux has caused Microsoft any problems in the market (and if you want to see Steve toss another chair, ask him if Vista caused Microsoft any problems in the market).

Already we see cracks in the each of the lock-in strategies. AT&T and their enabler Apple are repeatedly prodding Google to go nuclear, and recent rumors indicate Google may break the upgrade lock-in mechanism. Google is allegedly entering the hardware business and launching their own phones, to be available unlocked and at retail. Since G-phones are just as slick as iPhones, and since their open source souls allow for a broader range of potential applications, this is a market changing event. In the short term AT&T, Verizon and other lock-in experts will likely gouge customers slipping an unlocked G-phone onto their networks.

And that will be a mistake.

Smaller and hungrier carriers have already adjusted their voice plans to compete with the confusing and costly packages offered by the likes of AT&T and Verizon. Smaller carriers already offer flat-rate, unlimited voice plans and are earning sufficient revenues to expand their coverage maps (the chief differentiator of the major carriers). With over 70 GSM carriers in the U.S., the potential for competition is huge – vendor lock-in is thus a poor long term strategy.

This is where Google aggravates this situation. Currently, unlocked phones are a small business (albeit growing). Amazon sells unlocked phones, but has a special FAQ page due to the confusion factor and a general lack of iPhone-level lust for unlocked gizmos. A Google phone on Wal-Mart shelves with Google-simple instructions for swapping SIM cards will change the demand side of the equation. This will help the smaller carriers and tempt one of the major carriers to drop the data plan requirement.

Likewise, Barnes and Noble is teaming up with Adobe to promote open standards in ebook data formats, directly attacking Amazon’s Kindle lock-in and opening the ebook reader market to manufactures everywhere.

So when should a vendor employ a lock-in strategy? It depends on how much of your soul you are willing to give the Devil, but it does have a place in growth strategies. In new markets where you are taking large risks by inventing and promoting new product concepts, lock-in may be necessary to temporarily forestall competition and to guarantee some degree of recurring revenue. Amazon’s Kindle is a good example. Though not a new concept, Amazon was attempting to popularize ebooks and needed to assure that consumers would come to Amazon to buy the books as well as the reader. Publishers also need some assurance that the market would not be confused by too many products spread over too many vendors.

But lock-in is short lived – aside from mainframes and Cognos PowerHouse – and should not be a strategy on which to pin all future hopes. Amazon should have moved toward an open document format with the Kindle II, which in the short run would have cannibalized hardware sales while solidifying Amazon as the place for ebooks and growing the ebook market.

I’d have more to say, but I want to spend some time browsing unlocked phones on Amazon.

Bookmark to:

I wonder what antitrust agency lawyers will make of Oracle’s acquisition of Sun. Not that it matters much as Larry Ellison has slain that dragon before. Rumor has it the heads of three lawyers are mounted on the wall of Ellison’s office (knew I liked Larry for a reason).

(next graphic borrowed from JoinVision.com – click to enlarge)

The database market is tiny when measured by the number of serious competitors. Oracle is the king of the enterprise database server beasts while IBM’s DB2 or Microsoft’s SQL Server holds a tenuous second places (depending on whose measure you use, the common analyst measures being revenues, installations, recent developer involvement, moon phases or the pattern of chicken bones tossed into a fire pit). Microsoft’s SQL Server has its adherents, but that is largely out of religion for Windows not over-arching trends. Also-rans like Ingress, Sybase and others have receded into obscurity. For enterprise database technology, this is a seriously contracted market and one that would cause any government lawyer to skip their triple martini lunches.

Now Larry is buying the bottom of the market.

In Sun he also gets MySQL, the Open Source competitor for which Sun overpaid. MySQL not only has absconded with nearly the entire low end of the market (a sector where Oracle never made money nor marketed their wares with any real intent), but it is eating most of the middle ground as well. When I talk to CTOs and ask them about non-mission critical applications, they contentedly use MySQL and forgo the expense of establishing another Oracle instance.

That has to annoy Ellison no end (knew I liked MySQL for a reason).

In buying Sun, Oracle is significantly consolidating the entire database market, and demonstrably the enterprise database market. Granted MySQL’s Open Source nature means Oracle doesn’t really control it at all. Larry can’t kill it off on a whim. Yet Oracle can influence its growth, support and overall market viability. Oracle can affect MySQL’s future.

More to the point, the government simply does not like one corporation owning a wide or deep part of any market, and now Oracle has both. It has width – covering one half of the enterprise database market (if you consider Microsoft’s SQL Server an enterprise solution) and it has depth now owning – for practical purposes – the bottom and middle via MySQL. Using rough estimates of penetration, we can visualize what most of us instinctively know about this merger – that the number of alternative providers in the market is suddenly smaller.

Ignoring for a moment MySQL and the steam venting from Steve Ballmer’s ears this morning, the other parts of Sun are equally interesting, both from a market and an antitrust standpoint. Like MySQL, Java is Open Source. But Oracle has a vested interest in Java given the architecture of Fusion and derivatives. With Oracle dominating the enterprise application market and competitors depending heavily on Java for their applications, there is an inherent competitive advantage for Oracle to control the fate of Java. Again, being Open Source, Larry can instigate only limited intrigue, but there is enough leverage to make trouble for his foes.

Despite the potential for using SPARC’s massive multi-threading chip to create a monster database engine, I cannot seriously believe Oracle wants to get into the server hardware business. X86 architectures are the new norm and if today’s VMWare introduction of vSphere 4 is an indication, the cloud is the new mainframe, making SPARC’s minor advantage irrelevant.

Finally, there is StorageTek, another outfit Sun bled too much cash for (was Jonathan Schwartz secretly on a buying spree for Larry?). All data needs backup, but storage is a highly competitive arena and Oracle prefers fat software margins over skinny and shrinking hardware margins. Spinning off StorageTek is highly likely though who the buyer might be is unclear. Perhaps Oracle will do with StorageTek what EMC did with VMWare and create a beast with two backs.

Regardless, we can expect the Fed’s to get deeply involved and for Ellison to crush them. Owning control over MySQL and Java are juicy enough for him to play hardball (as if he knows any other way). All this time I worried about the technology business being commoditized. I should have been worried about Oracle swallowing it whole.

Bookmark to:

Silicon Strategies client DeviceAnywhere has the good sense not only to employ us, but to take the pulse of their own industry on a regular basis. Knowing that trends change over time helps companies know how best to serve their customers – to anticipate their needs

DeviceAnywhere surveys examine what technologies mobile applications developers design for, how DeviceAnywhere services are used and most interestingly what kinds of mobile applications are being written. This last bit says everything about how the mobile application market has shifted and what consumers really want.

They want the Internet in their pocket.

The Internet is a success because it is Darwinian in nature. Every mutant content provider self-formed out of the digital muck, rapidly mated in orgiastic enthusiasm, and new species of content and application are perpetually being delivered. Go forth and iterate.

The reason a Darwinian Internet creates is popular is that every possible combinations of content and amusement is tried, with the failures dying in obscurity and the winners consuming ever more bandwidth. Even seemingly trivial Internet applications – and by this I mean Twitter – can evolve into ragingly popular services.

Humans are now Internet addicted. Waiting to get home or to the office to hear music, read news or toke on Tweets creates withdraw symptoms. DeviceAnywhere’s survey shows that the majority of developers are focused on mobile Internet – more so than games, downloadable content or mobile banking. Mobile smut was not specifically mentioned, but I’m sure access to such content while riding the bus to work is a significant part of the new mobile content movement.

Price reductions in mobile data bandwidth paired with increasing demand for Internet content and the simplicity of maintenance/delivery of web content/applications is conspiring to fundamentally change the mobile application market. Mobile internet is becoming as ubiquitous as mobile handsets. Over time developers have and will continue to drift toward creating mobile experiences based on Internet technologies, mainly web.

For handset makers, the breeds an imperative: creating stable, strongly standards-compliant micro PCs. The closer a handset can come to mimicking everything about the desktop Internet experience, the more content that handset can deliver and the more mobile application developers will drift toward that solution set.

Commoditization of the means of delivery.

This brings to the fore an interesting question: What happens to major parts of the mobile industry when everyone and his dog focus on mobile Internet application? Good things in general happen from the customer perspective, though certain vendors will be left eating air. First, the differentiation of the handset operating system becomes minimized. People will not pick handsets based on the relative irrelevancy of built-in tools but the ability to deliver the profusion of online applications. Sure, certain combinations have staying power. For example I’ll always begrudgingly use a Windows handset because Outlook runs my life and strict compatibility is essential. But for the super majority of buyers, Internet delivery (web, Java, 2.0, etc.) will be the growing decisive factor. After that, the ease and joy of using the device will drive handset sales, which is where Apple currently hold and advantage.

It also means a latent boon for web application tool vendors that can find mobile Internet leverage points for their offerings. Toolsets that allow for the creation of mobile web/Java apps will gain favor with developers who follow the trend. A mobile application needs to gather handset info, contribute to analytics and leverage handset features (like GPS) to make it more useful than the next mobile development toolset.

Does this mean native applications like BREW, Windows/exe and Android/Linux installables are going away? Slowly, yes. There are applications people need and want to run when not connected to the net. But given the integration of Java into the Internet experience and the ability to install over the air a Java application, handset support of a well architected native Java virtual engine will be more important. The divide becomes what applications are installed at the factory and which are so important the relative fragility of wireless data connections mandate manual software installation (my handset’s GPS software being an example). Everything else goes web and other Internet standards staples.

The more things change the more they commoditize.

Bookmark to:

The FCC has created the next big technology gold rush, literally out of thin air. Chip and mobile technology mavens are the first folks who will strike the new mother load, but others will follow.

In between existing television channels are buffers collectively called “white space”. The FCC established these buffers in the Bad Old Days™ because back then television broadcast equipment was less than precise. A broadcast signal could drift a little up or down the frequency spectrum causing recliner-bound fathers to order their children to adjust dials, knobs and rabbit ears (if you do not know what “rabbit ears” were, then you are too young to be reading this). Basically white space buffers kept channel 2 from clobbering channel 3.

But with television broadcasts going digital this February and the unused white space spectrum being valuable, the FCC has opened it up for “unlicensed” use. Unlicensed spectrum devices do not require getting FCC approval for every user. Your home wi-fi, your kids walkie-talkies, your BlueTooth toys are all unlicensed gear. Unlike all these gizmos, signals for devices in the white space 700MHz band can travel for miles and go through walls, which is why your old television worked indoors even if your kids couldn’t tune it properly.

The FFC’s idea is to open white space for unlicensed data devices. Being unlicensed, there is little restriction for what this space can be used. As long as the device follows FCC mandated rules for not interfering with other devices, anything goes. Think of it as wi-fi without the limitations of wi-fi. Think of a long distance wi-fi connection that runs between 10-20 megabits a second (slower than home/corporate wi-fi but significantly faster than 3G mobile data). Think of it as a huge arena where devices will freely communicate with other devices in an all but unregulated environment.

Think that this market is 100% untapped.

Like the Internet itself, profit in the white space derives from its unregulated nature. When the cost of entry is low and the variety of uses nearly endless, potential and profitability are mind boggling. Chip makers will be obvious early winners, and I expect Intel will quietly shift some of their WiMax investments to WhiteSpaceMax in 2009. Cisco no doubt has engineers soldering away on breadboards today. Since Google pushed hard for the FCC to allow white space exploitation, they likely have an advertising revenue backend already mapped.

These are the obvious profiteers. The yet identified winners fall into two categories: companies that understand new uses of data and companies who redefine “devices”. We have to look at these in inverse order.

What is a “device”? An automobile is a device. So is a toaster. I can think of about 100 useful ideas on how a car with free long distance wi-fi could benefit from data. So far I’m drawing a blank on how toasters would benefit from having fresh data feeds (maybe my brain needs some toasted carbohydrates to restart the idea factory). Creative minds who view “devices” as an abstract, and who can leverage the wealth of data available via the Internet, going to make some money.

Let’s take a really simple idea like GPSs and gasoline. If a GPS maker augmented their product to mine the data at GasBuddy.com, the device could at the press of a button find the cheapest gasoline nearby, guide the driver there, then prompt him to enter-in what they paid and thus update the GasBuddy database. When gas goes back to $4 a gallon, this will be a much sought after addition (note to Garmin, TomTom and everyone else in the GPS business — considered this copyrighted and I expect royalty checks when you implement this).

But GPS toys are existing devices. What previously unimagined gizmo could be mass manufactured and download/upload data? The answer may lie in what data is useful in motion when using a cell phone is not practical. Or better still, when a cell phone is present but passive. Imagine an eye-level billboard that sense that you are standing in front of it, and from some white space signal knows who you are (is told your cell phone number). Based on a database in the cloud, it could tailor an advertisement to you and the location where you are at (“Hungry? Try the Peking Cat restaurant two block east on Main Street. Much better than the Vietnamese food you ordered online last week from Wok my Dog.”)

Combinations of existing devices may suddenly become useful by their ability upstream data. Convinced your kid is abusing his driving privileges? Why not add a camera in the car, tied to the speedometer and GPS system that streams audio/video/location/velocity data back to your PC, and let’s you VoIP him in real time? “Billy, get your hands off your girlfriend and back on the wheel …. NOW!”

White space is a big and very empty world. But it is a largely unregulated world and one ready for profiteering.

Bookmark to:

Advertising is only part of Google’s gain with mobile phones.

Much has been made about Google’s mobile advertising potential in deploying Android, their free Linux-based mobile operating system. Google will indeed make a(nother) boatload money through advertisements on cell phones. But this is only part of the Google strategy. The other components should worry competitors more.

Let’s stipulate a few things in order for the market dynamics to be clear:

• Mobile devices are the prophesized unified communications portal (servers be damned).
• Due to constant availability, mobile devices will become the first option for most people for discovery and use of information.
• Unifying the end user experience while roaming and at the desk creates commitment by the customer/user.

Therein lay the competitive threat from the G-Phone. For years now Google has created end user services (search, maps, photo galleries, office apps, more). The services are generally cost free for the users. These applications have mobile counterparts and most (soon all) are bundled on G-Phones.

In other words, Google built the backend to mobile services before offering mobile phones.

Contrast this with Apple and the occasionally-on Mobile Me. Apple delivered a fancy handset and later added server-side applications that crashed often enough to cause the news media to suspend their Apple Adulation long enough to question if massively scaled server operations were Apple’s forte. Alternately Google has built an empire on centralized services and now is creating the mobile experience to extend it.

Sure, Google gave away mobile apps all along and you can run any of those apps from nearly any mobile handset (thanks to Google testing those apps using the services of another Silicon Strategies Marketing client DeviceAnywhere). But Google prioritizes access to these applications by bundling them onto G-Phones. Since the unit cost to handset makes for G-Phone system is zilch, handset vendors have a great incentive to adopt Android, put G-Phones in the hands of their customers and thus make Google apps the defacto mobile standard.

Slick.

Now here is where things get a bit scary … scary enough that the Federal Trade Commission will eventually investigate. Once enough people adopt Gmail, Google Office, Picasa, etc. for their application of default, Google track almost every moment of your life (turn off the cell phone camera when you and your sweetheart go to bed). Google will have a direct intelligence spread superior to the U.S. government.

Perhaps the CIA will be more interested in Google than the FTC.

Google has executed a classic blocking maneuver that will feed their core advertising business. By making mobile and desktop a contiguous environment they drive a wedge between users and all application competitors. All things being equal, who wouldn’t want to use the same apps in the office and in a restaurant? Microsoft can’t compete because they won’t give away Window’s Mobile to handset makers or port mobile apps to non-Windows handsets. Symbian will not compete as there is no central server backbone for applications.

Slick.

After the markets finish sinking, buy Google. Their mobile advantage will take Google stock even higher.

Bookmark to: