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Deus ex Machina

Apple Inc. v. Samsung Electronics Co., Ltd. makes for powerful courtroom drama. Calling it drama, however, is faint praise. It’s entertaining and thrilling but the effects are shallow and they don’t last.

I have been asked to comment on the trial that just concluded and I find it difficult. The problem for me is that I’ve seen too many of these dramas. From the United States v. Microsoft to NPD v. RIM and Nokia v. X, Y or Z to make sweeping conclusions. This frustrates the journalist.

The problem is that the process of litigation leads to little satisfaction for any of the parties. There is always the anticipation of catharsis, but it never comes. The expectation is understandable. We are led to believe that the law is decisive, the ultimate adjudicator. The reason it isn’t is that the system was established in a different era. A time when technological change was slow, or non-existent. As a result the institutions of law move so slowly that they are nearly futile in administering justice or righting wrongs.

Here are just a few problems I can cite without any research:

  1. Legal processes are glacial. They tend to last longer than the lives of the products being litigated. In the case of phones with shelf lives of six months to a year, the trials are unlikely to get underway before the accused infringer is already off the market.
  2. The law is ambiguous. IP law varies and is subject to interpretation. What one jury (or judge) finds unanimously infringing another will find non-infringing. This gets even more dramatic when comparing decisions across countries and legal systems and through appeals processes and the influence of political considerations.
  3. It’s a big world. Even though patents can be internationalized, the way they are enforced varies.
  4. The financial penalties or awards are arbitrary. As exposed during the Apple v. Samsung (US) trial, the impact of infringement can be calculated numerous ways, all hypothetical.
  5. It is incredibly complex. The technicalities are so onerous that they baffle judges and lawyers and legal experts, not to mention company management and lay jurors.
  6. It is costly. Only major companies or those backed by legal hit squads can participate in litigation. This means it sustains incumbents rather than facilitate entry. By necessity, entrants need to “route around IP.”

But the most damning thing about the litigation process is that it’s assumed to be decisive. Decisive in terms of altering the success (or failure) of companies. That rarely happens. Instead it adds friction to an existing, inevitable outcome. Sometimes it cripples the winner and rewards the loser.

Therefore strategists need to be careful to avoid placing their faith in this system. It’s a lottery at best, a time and money sink at worst. Considering the analogy to litigation as drama, I would re-phrase this caution as a warning not to treat litigation as Deus ex Machina. It’s not something that will get your business out of a jam or reward you for a violation, perceived or real.

Practically, these exercises in drama are used to signal. Signal to competitors, partners, customers and employees. In other words, they are used to create psychological effects. But we know that psychology can be effectively shaped with other messages. Signals that products themselves give (positioning), or that are shaped by communications via advertising. And these means for signaling are much more effective than using the legal system. So why not use traditional means of signaling?

This is the crutch of Deus ex Machina. That this artifice will help tell a story. That “a seemingly unsolvable problem is suddenly and abruptly solved with the contrived and unexpected intervention of some new event, character, ability, or object.”

It won’t.

Exclusive interview with Asymco's Horace Dediu | The Tech Block

Horace, you spent nearly a decade at Nokia, where you worked as a business development manager and industry analyst. Did you foresee their current, increasingly dire situation?

I did not see an explicit downfall. I anticipated difficult times ahead and a deep crisis. My view of what would happen was published as my first Asymco post.

What led you to start Asymco?

I started a consulting company which I hoped would generate leads through a blog. The blog became far more exciting than consulting and it became my primary focus after about one year. I had no ambition to write for a living or to be a “blogger”. I did not anticipate there would be any interest on the topic I wrote [about] beyond a handful of people. In that regard, things played out as they do at most start-ups: what you end up doing is not anywhere near the target you aimed at.

Apple’s clearly one of your favorite topics. What about the company appeals to you?

Business education is predicated on storytelling, also known as the case method. Business management is not a discipline that has “axioms” defining basic truths, or if it does, they change frequently. Therefore business education (i.e. the MBA) is the equivalent of people teaching each other by telling stories around a campfire. The best stories get repeated more often and are better ‘teaching tools’. So it is with Apple. It’s a great medium for story telling because people can see the stories unfolding in real time or at least within their lifetimes. They are not about a distant past or an abstract industry. There is also a lot of passion around the brand, both positive and negative and so it leads to more attention.

Read more here: Exclusive interview with Asymco’s Horace Dediu | The Tech Block.

The poetry of Steve Ballmer

Steve Ballmer July 9th, 2012 on competing with Apple:

We are trying to make absolutely clear:
We are not going to leave any space uncovered to Apple
We are not.
No space uncovered that is Apple’s
We have our advantages in productivity
We have our advantages in terms of enterprise management, manageability
We have our advantages in terms of when you plug into server infrastructure in the enterprise.
But we are not going to let any piece of this [go uncontested to Apple]
Not the consumer cloud
Not hardware software innovation
We are not leaving any of that to Apple by itself
Not going to happen
Not on our watch.

Steve Ballmer, July 2010 on competing with Apple’s iPhone and iPad:

Asymmetric competition | Horace Dediu | Mobilism 2012 on Vimeo

Here is a video of my presentation at Mobilism 2012 on the story of mobile phone disruption. Thanks to Peter-Paul Koch (aka PPK) for organizing a great event and allowing me to present to such a smart and knowledgeable audience.

Asymmetric competition | Horace Dediu | Mobilism 2012 on Vimeo

Nearly one third of the time is spent in Q&A, which, even if I do say so myself, is the best part.

Also note the exclusive use of a custom iPad app for wireless presentation (pre-release version of the Perspective App.)

Jim Zellmer interviews me about my life

This is a transcript of a voice interview conducted April 19th 2012.

The interview is available as an audio file here.

Jim Zellmer: I thought we’d start by describing your education from the beginning, Horace.

Horace Dediu: OK, that’s good, yeah. I like to say I’m the product of the public school systems. I went to public schools in three different countries, and probably maybe a dozen different schools altogether because we moved a lot, moved over 30 times.

My family emigrated, and we were what you might call political refugees for a while. We were stateless. We didn’t have passports. We were officially not citizens of any country. So, for a period of about four or five years, that was the case. I started having regular schooling in Romania, and then moved to Italy and was enrolled in a school, actually, in the city of Verona, which is where “Romeo and Juliet” was originally set.

I was saying…my background. I spent a year in school in Italy, and I went to school in the north of Italy, in Torino. The thing was that I didn’t know Italian, so I actually had to learn. But that’s a lot easier for children. I was about nine, I think. And so, I learned Italian, was able to have a good school year. But then we moved.

In the summer, we moved again, and we emigrated to the United States. It took about a year to get the paperwork for that–because that was our ultimate goal was to be in the US. I was enrolled in the public schools. First, in Cleveland, where we found someone to help us. I actually went to, I guess, elementary school in the city of Cleveland, where we lived.

And then, later on, for middle school… What happened in Cleveland around that time was that busing started, desegregation. It would have meant, for me, more than one-hour journey across the whole city, from the west end to the east end of Cleveland, and my parents would have none of that. So, we moved to a suburb, immediately adjacent, which is called Lakewood. I went to middle school and high school in Lakewood, Ohio, for three years in high school.

And then, we actually moved yet again, to Boston. My father got a job in the booming tech sector at the time, which was in the early ’80s. I ended up in a suburb of Boston called Medford. We didn’t know much. Again, we were flying pretty blind here. We weren’t familiar with neighborhoods or what were good schools or anything like that–“good schools.” Mostly it was a question of, “Can we find affordable housing?”

Medford turned out to be a pretty lucky choice. In one hand, at the time, it was a blue-collar town. It was one of the near suburbs. So the closer to the city, it tends to be the older the immigrant generations are. It was settled mostly by Italian Americans. And so, a lot of the children I met in school were of some ethnic background.

Again, in the Midwest, that was a bit more rare. So East Coast, for me, was a little bit more vibrant in the sense that there were more interesting ethnic backgrounds and people from different histories and so on.

I enjoyed it, but I only had one year at Medford High School. It was actually more enjoyable, that year, I would say, than my years in Ohio. I have friends that I retained from that one year, and I don’t have friends I stay in touch with from Ohio.

But it has changed. The city since has become much more, I would say, a lot of those families moved yet again, probably to a further suburb, and has changed character. I think it’s more Hispanic now, the city overall. Nothing wrong with that, it just probably would feel different to anyone there now.

I was, again, in Medford. My choice, my next question, was where to go to college. I had been doing OK in school. And that was an interesting puzzle to solve as a kid, because you don’t quite know how to fit in, the usual problems. Fortunately, having moved around so much, I had a pretty thick skin, and having had an accent or a strange background just made you a little bit tougher. And so, I was pretty immune to some of the high-school politics.

I focused on studies, and my parents are both educators. My father has a PhD in mathematics, and my mother had a Master’s in mathematics and she taught. Actually, her job was as a teacher. They both got certified as teachers in the United States. My father had taught, also, university in Romania, but he ended up teaching high school and other two-year colleges in the US. It’s very hard to go into academia from another country.

In any case, the fact that I had such devoted, academically inclined parents helped in focusing me on academics. That also, I think, was my nature. As far as college, my concern, we always had financial concerns, right?

Jim Zellmer: Right.

Horace: So, for me, I wasn’t interested in the social aspect of college. For us, really, the decision was, “Can we keep expenses down?” I was accepted at Tufts University and also at Brandeis, which were local. That was important to me, that it would be near to my home and I could actually commute to these places.

Take the money and run

In August 2007, during the HD format wars between HD-DVD and Blu-ray format, Toshiba offered Paramount and Dreamworks $150 million to produce HD versions of their movies exclusively as HD-DVD.[1]

This type of deal is equivalent to an “advance” offered to a book author. The DVD manufacturer pays studios up-front cash for the right to make its DVDs. From an accounting point of view this is treated as an advance that the manufacturer recovers by selling the DVDs back to the studio’s video division in the same way a publisher earns back the advance it gives an author.

In this case, the payment was so large and the sales of HD-DVDs so small that Toshiba was unlikely to earn back the entire advance. The way the deal made any sense for Toshiba was that it was exclusive: the studios could not continue to release their movies in Blu-ray. The deal was done explicitly to hobble a competitor and create “critical mass” of content for its own format.

But then in March 2008, Toshiba threw in the towel and abandoned the HD-DVD format. The way the deal worked, the studios got to keep almost all of the $150 million. They then re-released all their movies in the Blu-ray format. The only “cost” to the $150 million windfall was that there was a nine month delay in the eventual release to Blu-ray–a small price to pay for an emergent format without a large install base.[2]

Platform owners go to great lengths to ensure “content” for their platform. They will, essentially, finance an ecosystem when there are barriers to entry or when competing ecosystems are far more lucrative.

This scenario for movies is being played again with Netflix, Hulu and other distributors who need to fill their pipelines. Netflix’s content acquisition costs are exploding and putting the whole company’s future in doubt.

But this scenario is also being played out with app developers. Most recently, news broke that developers are receiving payments from Microsoft for Windows Phone ports of popular apps. In mobile platforms, apps are the new content and developers are the new studios.  It’s also a practice that is not without precedent[3].

This is as it should be. The value of the platform lies mainly in what is built on top of it just like a foundation is not much use without a house on it. However, the practice of “priming the pump” with cash payments for porting is not ideal. Like spiffs, those who receive payments may become used to it and withhold development if there is no payment. Also, those who did not get payment offers may feel shunned and retaliate in kind. Those who receive payment may become cynical about it and may not put in the extra effort (or, more probably, outsource) to make the work spectacular.

Or, like Paramount, they may just take the money and run if/when the platform fails.

Notes:

  1. Source: The Hollywood Economist 2.0: The Hidden Financial Reality Behind the Movies by Edward Jay Epstein.
  2. Paramount made $250 million more from three “replication output” deals: $50 million from Toshiba for agreeing to release Titanic on DVD in time for Christmas sales, $150 million from Panasonic for agreeing to allow them to take over video replication from Thompson, and $50 million from the law firm Ziffrin, Brittenham and Circuit City stores for agreeing to support the DIVX format. Paramount got to keep the money even though DIVX never launched.
  3. Although it’s never been reported that Apple pays developers for building iOS apps, some developers do benefit from promotional placement and visibility during launch events and from early access to devices or SDKs under development.

The new feeds and speeds: iPad vs. MacBook Air and iMac

At last year’s iPad 2 launch, I compared the specs of the newly announced iPad with those of a laptop and desktop from five years earlier. This year I am comparing the new iPad with Apple’s computers from four years earlier:

The new iPad now exceeds the total display resolution, has similar speed and storage capacity while having twice the battery life of the thinnest laptop of four years ago. It also has very high quality cameras and GPS and cellular network connectivity which have yet to appear on mainstream PCs. It’s still a lot smaller and half the price and has a larger selection of available software titles at prices a fraction of its elder cousin.

My thoughts on iBook Author

My thoughts were expressed 20 months ago in a private email.

I did not get a response.

[Sponsor] Carnegie Mellon University (with a history lesson)

It gives me great pleasure to have Carnegie Mellon University as a sponsor this week. This is because CMU holds a special, historic role in the development of the platform at the center of the disruption of mobile telecommunications.

I am referring to the kernel behind OS X and iOS: Mach.[1]

When I was a researcher at GTE Laboratories, I remember following the progress of this alternative kernel. As a research project it was one of the earliest microkernels and, along with virtual memory management, inter-process communication and control innovations, pioneered what became the basis of highly modular operating systems. Those innovations enabled an architecture which allowed complex systems to scale down to micro computers and eventually to devices.

There is a huge amount of lore around Unix and CMU’s efforts are deeply interweaved into it (as are Berkeley and AT&T). I strongly recommend a stroll down that memory lane. But I’ll keep it short here and say that original developers of Mach at CMU went on to be key executives at both Apple and Microsoft. It was really a spectacular success as far as academic research projects in computer science. A real inspiration.

So with that history, I want to thank Carnegie Mellon University for their sponsorship and I’m glad to see continuing innovation in their degree programs.

Today they are offering a Master of Information Systems Management  degree with a Business Intelligence and Data Analytics concentration (MISM-BIDA). This particular degree program is essentially cross-training in business process analysis and predictive modeling, two methodologies which deeply benefit from one another. Much of what I do for this blog is exactly this:  mapping, analytical reporting, segmentation analysis, and data visualization. I’m glad to see that his has been codified into a degree program.

Students in the MISM-BIDA program learn to integrate information filters and mining tools with applied business methods yielding insights that you see celebrated in the media every day. They do this with world-renowned faculty teaching a cohesive blend of data analytics, management, strategy, and IT courses.

I can only assume that this unique mix makes graduates highly valued by  financial service firms, consulting companies, technology agencies and start-ups.

If you like the results of this web site and would like to learn how it’s done “by the book”, consider the degree programs at Carnegie Mellon Heinz College.

Highly recommended.

—-

Notes:

  1. Carnegie Mellon also had a role in the development of Siri.

Who is being reasonable now?

Last week Horace wrote about the apparent “reasonableness” of analyst Apple estimates. He explained how the consensus for Apple’s growth was always deeply pessimistic because its performance could be argued to be anomalous. It was just too good to be true. We reproduce the chart here:

The estimates look like characteristic “tell-tales” of a company running strong into the wind.

This conservatism in the face of rapid growth sounds “reasonable” but is it always practiced? And what about the ability of this conservative strategy to predict dramatic changes in growth? To test, we started to look at the predictions for RIM. RIM has also enjoyed strong growth over a similar time frame as Apple. How did analysts predict its performance? The following chart was prepared using the same technique as the one for Apple[1].