Marketing Memos

I opened a box of Cracker Jacks and the toy prize was a cell phone.

Not a smart phone, but a commoditized flip phone that handled voice conversations, kept a contact list and something that resembles a calendar.  A cell phone so fancy that two decades ago we would have taken a human life to obtain one, but today is so feature free that we might give it to a child so some day he can tell his kids how hard he had it.

Markets change constantly, but often products change faster than the markets that support them.  Take the cellular carrier market … please.  Given that the domestic customer base is saturated, carriers are in a constant struggle to keep customers locked into their networks and find new streams of revenue.  Yet they must also help finance your newer and more sophisticated cell phones in order to bring you (back) into their fold.  This is why a $600 smart phone costs you only $200.  The carrier makes back the money they spent on your handset by getting a guaranteed two years of revenue from you via the contract you signed.  Expanded continuing revenue also partially explains why they charge a mandatory network data fee for the newer and fancier phones (that and they want you to grow addicted to having data on demand 24 x 7 x 365 x everywhere and thus in the future perceive it as a necessity and not a luxury).

Despite a slate of new monthly charges for owning a cell phone, the industry has not changed much in decades.  Carriers subsidize handsets, pads and slates, earning their money on the backend.  This creates competition between hardware makers to gain favor and deals with carriers who erect barriers to customers using unlocked phones.  This game is fixed and the carriers are not interested in changing it much.

Which is why Google is breaking the system.

Anytime all competitors are content with the status quo, a great marketing strategy is to break the status quo.  We disreputable marketing types call this changing the rules of the market.  In a mature market you can gain first mover advantage by changing the rules.  The problem is that the more complex the market, with incestuous economics, numerous players and relationships, changing the rules is non-trivial.  Despite making a lot of cheap unlocked phones possible, Google found that Android by itself could not break the carrier subsidy model.  The carriers want money, and are unwilling to relinquish any tool that have for making more.

So Google is breaking the system in smaller chunks.

The hot part of the mobile market is apps.  Apple has a 3-to-1 advantage over Android in the apps department, though many of Apple’s 200,000 extra apps are of questionable commercial value.  This temporary Apple advantage is an Achilles heel since, from a functional level, Apple doesn’t offer much over Android.  Breaking Apple’s status quo of being an app leader is as important as getting more Android phones into people’s hands (though at their rate of growth, Android phones may dominate the market before the 2012 presidential election is over).

Google is breaking the system by changing the revenue model.  You know, that thing that is so important to the carriers.

According to reports, Google may share app revenue with carriers.  Currently carriers get glitch from the roughly $75M Apple earned from apps (another $175M went to developers).  With smart phones making about 5% of the market, this small-but-growing-like-a-virus market means real money down the road in just raw app sales, not to mention in-flow revenue opportunities.  Currently, Apple’s app share would contribute less than 2% of AT&T’s wireless services revenue, but 2% now beats 0%, and once smart phones make up the other 95% of the cell phone market, that number rises to 35% of services revenue.  Multiply this again by the growing roster of apps and their usefulness (sans meowing cat apps) and app revenues may well rival service revenues for the top-line.  Now multiply this revenue engine with pads and slates, many new flavors of which arrive this holiday shopping season.

Non trivial treasure.  Google knows it.  Verizon knows it.  AT&T knows it.  Apple knows it.

Given this new revenue stream, carriers have motivation to promote Android handsets.  Since they will be able to buy such handies from everybody (Motorola, HTC, LG, Demented Dave’s Cellular Designs, etc.) they in turn will focus on promoting the Google/Android brand as opposed to any specific manufacturer’s product.  By breaking revenue model, Google is also breaking the partner loyalty model, another Apple advantage.  AT&T may still sell iPhones … to 5% of the market.  They will sell Androids to the other 95%.

Several marketing lessons are intertwined herein:

1. First, in any market where partners own the customer relationship, odds are they will not give it up (i.e., allow unlocked phones to cheaply enter the space).
2. When partners have a lock on the end customer, you have to help partners make money.
3. If your competitor owns the partner relationship, you have to find ways of helping the partner profit that also hurts your competitors (in this case, robbing Apple of their app and partner-promotional advantage).
4. If the market ain’t broke, break it.

Bookmark to:

Hide Sites

I love it when people don’t get it – it means the market is ready to shift.

This week the geeks at Google released a gizmo that lets average people create Android apps via a brain-dead-simple user interface.  The reaction from the technical community involved hysterical laughter, deriding the tool and the alleged limitation of the applications it could craft.  Uniformly they snickered noting that while Apple’s App Store is loaded with professionally honed software downloads, Google was encouraging point-and-meow apps.  They used the news to lambaste Google’s Nexus One handset, which had a short life before cellular carriers started selling their own Android handies.

The technical community doesn’t get it, which means the market is about to shift.

Nexus One and the Android App Inventor served similar purposes, namely market seeding.  Android was a relatively new entrant into the handset OS market, and going up against Apple, Microsoft, RIMM, Symbian and other established players.  Adopting Android presented a risk to everyone – handset makers, software developers, carriers and consumers.  In order to reduce risk and encourage experimental adoption, Google needed to get a handset into people’s hands.  Thus they conscripted HTC to build One that showcased Android (and HTC was smart to exploit the opportunity to showcase their design and manufacturing capabilities).  This assured that developers, early adopters, carriers, analysts, reporters and even competitors saw what Android could do and in turn created both desire and FUD in the market.

Google used Nexus to move Android past a market hurdle.

Apple’s most significant remaining advantage in the market is its app store (face it, Android, Symbian^3, WebOS and maybe even Windows 7 mobile-whatever-they-are-calling-it-this-week have similar/identical/good-enough capabilities at the OS level).  Apple app richness is a market hurdle.  To get past that hurdle requires people believing that Android is a good environment for which to build apps (and given how well the durn things are selling in the East, Asian Android apps is a redundant phrase).  Android App Inventor is a simple tool for creating apps, and is the Nexus One of applications – it exists to reduce risk of discovery, and as a side effect, maybe cause a user to instigate the next great idea for an mobile application.

The reason misreading the intent of an event is an indicator of a market shift is that those slinging misguided rhetorical missiles are those of inert thinking.  When conventional viewpoints prevail, unconventional thinking succeeds.  Google recognizes the app market hurdle while various tech industry pundits don’t.  “The goal is to enable people to become creators, not just consumers, in this mobile world,” was how the Android App Inventor project leader phrased it.  “I think Google’s App Inventor tool that enables anyone to program an Android app could be profound,” opined one wag.

The unconventional thinking here is the same that drove social networks.  People, the unruly bunch that they are, have more net ideas than all the professional developers combined and raised several orders of magnitude, then multiplied by the number of interns politicians sleep with (that last item being a truly staggering sum).  Any of these end users may never perfect an app, but they will invent more apps that Steve Jobs has in his digital wet dreams.  Android App Inventor unleashes imaginations.

The best parallel I can recall was Borland.  In the early days of MS-DOS, a compiler cost a couple of thousand 1980’s dollars.  Borland put Turbo Pascal onto the market for $49 and every two-bit hack started writing applications.  Borland and shareware marketplaces, not Microsoft, made MS-DOS successful.  Rough hacks created by hobbyists were hijacked and converted into mainstream applications.  Android App Inventor follows the same path, taking it one step further by putting programmer power into the hands of every man, woman, child and highly functioning dog (though congressmen are still not yet advanced enough).

Android App Inventor is a game changer.  The pundits just don’t understand the game.

Bookmark to:

Hide Sites

Just keep reminding yourself that Compaq was an odd deal too.

Today Hewlett Packard palmed Palm for whopping $1.2B, or about 1/10^th of HP’s petty cash.  This was newsworthy for many reasons including the fact that Palm’s struggling handset line will now join HP’s struggling handset line (bet you forgot that HP makes cell phones – so did the rest of the market).  In a world where RIM owns the corporate market, Apple owns the consumer market, Microsoft hasn’t helped HP’s market, and Google/Android are changing the rules of the market, this marriage seems slightly more absurd than half of Hollywood hook-ups.

The deal is not without upside.  First, the market for mobile is not yet saturated.  Especially on the low end, there is plenty of green field. As unlocked handsets become more prevalent and popular, HP can use its retail savvy to shove cell phones into public ears.  I can almost here the cashier at Wal Mart saying “Would you like some printer cartridges with that?”

Interestingly, Todd Bradley is a top executive in HP’s Personal Systems Group and was also a former CEO of Palm.  In announcing the acquisition, Bradley noted that Palm had a lot of intellectual property, some 1,650 patents.  These alone might be worth the acquisition as it allows HP to license and monetize the investment, or choke the life out of competitors.  HP is not immune to litigating, though it is not their forte.

Otherwise the only item Palm brings to the table is a mobile OS, one so innovative and exciting that the market didn’t even bother to yawn.  In an industry where driving component cost down while improving the user experience is 90% of the battle, incorporating the Android OS makes much more sense, as recent mobile market share data shows.  Some speculate that HP wants a private OS to spread across handsets, slates and device types to be named later.  But buying Palm for this is like buying a deceased nag to run the triple crown.

Odds of winning are about the same.

All in all this appears to be an insider deal, were former Palm executives working in HP are overly optimistic about alleged synergies and product potentials.  But as far as technology companies go, HP has successfully merged other entities and made a buck or two.  The Compaq merger worked despite many misgivings (I had my doubts, but the dual brands and economies of scale in standardized PCs let HP take top honors away from Dell).  But HP has had its share of acquisition and partnership failures too (DEC via the Compaq deal is nothing, and outside of HP-UX nobody uses Itanium, much to Intel’s chagrin).

From an outside perspective, the market dynamics look oddly promising.  The smart phone market is growing at nearly a 40% CAGR clip and mobile data is almost the new norm.  But smart phones as a percent of all cell phones are still relative small –around 10% of all handsets according to some 2009 data and projections.  So perhaps HP is merely betting the long game – that by acquiring Palm and getting WebOS in shape, HP can catch the break of the new wave.

The problem is that HP needs to add something that the competition has not or cannot.  Palm has failed, and HP’s mobile bread is currently buttered by Microsoft, who is losing market share faster than Steve Ballmer is losing hair.  Assuming that HP cannot add magic (and, face it, they don’t do that very often), then they will have to compete on price.  Perhaps Palm’s IP combined with Compaq’s mass manufacturing prowess will shove deeply discounted smart phones into the market.  Given the bargains you can get on consumer edition HP and Compaq desktops and laptops at every office supply store on the planet, this might well be where HP is heading.

There is no marketing lesson today.  Just stunned wonder.

UPDATE: Perhaps I spoke too soon.  HTC announced that they are going to run and run hard with Android in an attempt to saturate the smart phone market.  They have a head start and will likely beat HP to the wave crest.  The marketing lesson is that if you see a hot mass market ready for exploiting, so do your competitors.  If they have a faster and cheaper approach than you, expect to lose.

Bookmark to:

Hide Sites

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:

Hide Sites

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:

Hide Sites