SpectralShifts Blog 
Sunday, 29 January 2012

Every institution, every industry, every company has or is undergoing the transformation from analog to digital.  Many are failing, superseded by new entrants.  No more so than in the content and media industries: music, retail, radio, newspaper and publishing.  But why, especially as they’ve invested in the tools and systems to go digital?  Their failure can be summed up by this simple quote, “Our retail stores are all about customer service, and (so and so) shares that commitment like no one else we’ve met,” said Apple’s CEO. “We are thrilled to have him join our team and bring his incredible retail experience to Apple.”

Think about what Apple’s CEO emphasized.  “Customer service.”  Not selling; and yet the stores accounted for $15B of product sold in 2011!  When you walk into an Apple store it is like no other retailing experience, precisely because Apple stood the retail model on its head.  Apple thought digital as it sold not just 4 or 5 products--yes that’s it—but rather 4-5 ecosystems that let the individual easily tailor their unique experience from beginning to end.

Analog does not scale.  Digital does.  Analog is manual.  Digital is automated.  Analog cannot easily be software defined and repurposed.  Digital can.  Analog is expensively two-way.  With Digital 2-way becomes ubiquitous and synchronous.  Analog is highly centralized.  Digital can be easily distributed.  All of this drives marginal cost down at all layers and boundary points meaning performance/price is constantly improving even as operator/vendor margins rise.

With Digital the long tail doesn’t just become infinite, but gives way to endless new tails.  The (analog) incumbent sees digital as disruptive, with per unit price declines and same-store revenues eroding.  They fail to see and benefit from relative cost declines and increased demand.  The latter invariably occurs due to a shift from "private" to public consumption, normal price elasticity, and "application" elasticity as the range of producers and consumers increases.  The result is overall revenue growth and margin expansion for every industry/market that has gone digital.

Digital also makes it easy for something that worked in one industry to be easily translated to another.   Bill Taylor of Fast Company recently wrote in HBR that keeping pace with rapid change in a digital world requires having the widest scope of vision, and implementing successful ideas from other fields.

The film and media industries are a case in point.  As this infographic illustrates Hollywood studios have resisted “thinking digital” for 80 years.  But there is much they could learn from the transformation of other information/content monopolies over the past 30 years.  This blog from Fred Wilson sums up the issues between the incumbents and new entrants well.  Hollywood would do well to listen and see what Apple did to the music industry and how it changed it fundamentally; because it is about to do the same to publishing and video.  If not Apple then others.

Another aspect of digital is the potential for user innovation.   Digital companies should constantly be looking for innovation at the edge.  This implies a focus on the “marginal” not average consumer.  Social media is developing tremendous tools and data architectures for this.  If companies don’t utilize these advances, those same users will develop new products and markets, as can be seen from the comments field of this blog on the financial services industry.

Digital is synonymous with flat which drives greater scale efficiency into markets.  Flat (horizontal) systems tend toward vertical completeness via ecosystems (the Apple or Android or WinTel approach).  Apple IS NOT vertically integrated.  It has pieced together and controls very effectively vertically complete solutions.  In contrast, vertically integrated monopolies ultimately fail because they don’t scale at every layer efficiently.  Thinking flat (horizontal) is the first step to digitization.

Related Reading:
Apple Answers the Question "Why?" Before "How?" And "What?"
US Govt to Textbook Publishers: You Will Go Digital!
This article confused vertical integration with vertical completeness
Walmart and Retailers Need to Rethink Strategy
Comparison of 3 top Fashion Retailers Web and App Strategies

Software Defined Networking translated to the real world

Posted by: Michael Elling AT 10:54 am   |  Permalink   |  0 Comments  |  Email
Sunday, 22 January 2012

Data is just going nuts!  Big data, little data, smartphones, clouds, application ecosystems.  So why are Apple and Equinix two of only a few large cap companies in this area with stocks up over 35% over the past 12 months, while AT&T, Verizon, Google and Sprint are market performers or worse?   It has to do with pricing, revenues, margins and capex; all of which impact ROI.  The former’s ROI is going up while the latters’ are flat to declining.  And this is all due to the wildness of mobile data.

Data services have been revealing flaws and weaknesses in the carriers pricing models and networks for some time, but now the ante is being upped.  Smartphones now account for almost all new phones sold, and soon they will represent over 50% of every carriers base, likely ending this year over 66%.  That might look good except when we look at these statistics and facts:

  • 1% of wlx users use 50% of the bandwidth, while the top 10% account for 90%.  That means 9 out of 10 users account for only 10% of network consumption; clearly overpaying for what they get.
  • 4G smartphone displays (720x1280 pixels) allow video viewing that uses 300x more capacity than voice.
  • Streaming just 2 hours of music daily off a cloud service soaks up 3.5GB per month
  • Carriers still derive more than 2/3 of their revenues from voice.
  • Cellular wireless (just like WiFi) is shared. 

Putting this together you can see that on the one hand a very small percentage of users use the bulk of the network.  Voice pricing and revenues are way out of sync with corresponding data pricing and revenues; especially as OTT IP voice and other applications become pervasive. 

 

Furthermore, video, which is growing in popularity will end up using 90% of the capacity, crowding out everything else, unless carriers change pricing to reflect differences in both marginal users and marginal applications.  Marginal here = high volume/leading edge.

So how are carriers responding?  By raising data prices.  This started over a year ago as they started capping those “unlimited” data plans.  Now they are raising the prices and doing so in wild and wacky ways; ways we think that will come back to haunt them just like wild party photos on FB.  Here are just two of many examples:

  • This past week AT&T simplified its pricing and scored a marketing coup by offering more for more and lowering prices even as the media reported AT&T as “raising prices.”  They sell you a bigger block of data at a higher initial price and then charge the same rate for additional blocks which may or may not be used.  Got that?
  • On the other hand that might be better than Walmart’s new unlimited data plan which requires PhD level math skills to understand.  Let me try to explain as simply as possible.  Via T-Mobile they offer 5GB/month at 3G speed, thereafter (the unlimited part) they throttle to 2G speed.  But after March 16 the numbers will change to 250MB initially at 3G, then 2G speeds unlimited after that.  Beware the Ides of March’s consumer backlash!

Unless the carriers and their channels start coming up with realistic offload solutions, like France’s Free, and pricing to better match underlying consumption, they will continue to generate lower or negative ROI.  They need to get control of wild data.  Furthermore, if they do not, the markets and customers will.  With smartphones (like Apple's, who by the way drove WiFi as a feature knowing that AT&T's network was subpar) and cloudbased solutions (hosted by Equinix) it is becoming easier for companies like Republic Wireless to virtually bypass the expensive carrier plans using their very own networks.  AT&T, VZ, Sprint will continue to be market performers at best.

Related Reading/Viewing:
AT&T pricing relies heavily on breakage
Useful stats on data growth from MobileFuture
FoxNews report on AT&T Data Throttling
This article actually suggests "dissuading usage" as 1 of 4 solutions
Consumer reports article whereby data equivalent voice pricing = 18 cents, OTT on lowest plan = 6.6 cents, OTT on highest plan = 1 cent
New shared data plans set a new high standard

Posted by: Michael Elling AT 09:13 am   |  Permalink   |  0 Comments  |  Email
Sunday, 15 January 2012

“There is no clear definition, but usually the Singularity is meant as a future time when societal, scientific and economic change is so fast we cannot even imagine what will happen from our present perspective, and when humanity will become posthumanity.”  Futurist Ray Kurzweil wrote the Singularity is near in 2005 and it sure felt that way at CES in Las Vegas in 2012. 

In any event, we didn’t come up with this association.  Matt Burns at TechCrunch did during one of the live streamed panel discussions from the show floor.  But given that we’ve been at the forefront of mobile devices and networks for 2 decades, we couldn’t have said it any better.  After all this time and all these promises, it really felt like all the devices were connected and this app-ecosystem-mass was beginning to move at a pace and direction that none of us could fully explain.

Vernor Vinge, a sci-fi writer, coined the expression back in the early 1990s.  When you look at the list of publications at the Singularity Institute one can’t help but think that the diaspora of different applications and devices self organizing out of CES 2012 isn’t the beginning of AI.  Will AI develop out of the search algorithms that tailor each individuals specific needs, and possibly out-thinking or out-guessing the individual in the process?

We probably won’t know the answer for at least a decade, but what we do know is that we are about to embark on a wave of growth, development and change that will make the past 30 year WinTel-Internet development look embryonic at best.  After all the Singularity is infinity in mathematical terms.  Hold onto your seats.

Posted by: Michael Elling AT 09:10 am   |  Permalink   |  0 Comments  |  Email
Sunday, 08 January 2012

Yahoo executed on the portal concept better than any other company and one time was worth $113B.  Today it is worth $17.6B and is trading at 12.9x operating cash flow.  But its interest in Chinese and Japanese subsidiaries is $19B pretax or $13B aftertax.  Either way YHOO is absurdly cheap on $5B of revenue and $1.4B cash flow and 700 million users.  So new CEO Thompson has a chance to pull off the turnaround of the century for a company that is hard to define by many.

What would we do in his shoes?

First, we would go back to what made Yahoo so valuable in people’s eyes to begin with, namely an approach that used others’ content and turned it into gold via traffic streams and advertising revenue.  As a tools and application company they have been pretty poor at monetizing their innovations.  Ultimately, the chief reason people came to Yahoo was the breadth and easy accessibility of the information, making people shout “yahoo” in joy.  The brand is a great brand after all and one of the real internet originals which will fix itself.

So what is the “new” content today?  Applications.  Yahoo should evolve from content portal to "app-portal".  More specifically we are about to witness an explosion of cross application solutions and commerce that will develop entire new ecosystems of revenue opportunity.  And these will exist across multiple platforms and screens as one writer points out.  Facebook is trying to harness this opportunity with Opengraph, but already people might be concerned that it is just too much confusion and overkill and TMI.

Yahoo can not only remove that confusion but allow people to tailor their own environments.  HTML5 and connectivity across smartphone, TV, tablet and PC/ultrabook will pave the way.  Understanding and harnassing the big data required to do this is one of Thompson’s key attributes.  At the same time virtual currencies can be created to monetize this interactivity beyond mere advertising and that’s what Thompson brings from Paypal.

With over 70 different services/tools and 14,000 employees, Thompson will definitely have to restructure, reduce and refocus in order to have the resources to aggressively develop an app-portal future.

Posted by: Michael Elling AT 08:43 am   |  Permalink   |  0 Comments  |  Email
Thursday, 05 January 2012

Counter-intuitive thinking often leads to success.  That’s why we practice and practice so that at a critical moment we are not governed by intuition (chance) or emotion (fear).  No better example of this than in skiing; an apt metaphor this time of year.  Few self-locomoted sports provide for such high risk-reward requiring mental, physical and emotional control.  To master skiing one has to master a) the fear of staying square (looking/pointing) downhill, b) keeping one’s center over (or keeping forward on) the skis, and c) keeping a majority of pressure on the downhill (or danger zone) ski/edge.  Master these 3 things and you will become a marvelous skier.  Unfortunately, all 3 run counter to our intuitions driven by fear and safety of the woods at the side of the trail, leaning back and climbing back up hill.  Overcoming any one is tough.

What got me thinking about all this was a Vint Cerf (one of the godfathers of the Internet) Op-Ed in the NYT this morning which a) references major internet access policy reports and decisions, b) mildly supports the notion of the Internet as a civil not human right, and c) trumpets the need for engineers to put in place controls that protect people’s civil (information) rights.  He is talking about policy and regulation from two perspectives, business/regulatory and technology/engineering, which is confusing.  In the process he weighs in, at a high level, on current debates over net neutrality, SOPA, universal service and access reform, from his positions at Google and IEEE and addresses the rights and governance from an emotional and intuitive sense.

Just as with skiing, let’s look at the issues critically, unemotionally and counter-intuitively.  We can’t do it all in this piece, so I will establish an outline and framework (just like the 3 main ways to master skiing) and we’ll use that as a basis in future pieces to expound on the above debates and understand corporate investment and strategy as 2012 unfolds.

First, everyone should agree that the value of networks goes up geometrically with each new participant.  It’s called Metcalfe’s law, or Metcalfe’s virtue.  Unfortunately people tend to focus on scale economies and cost of networks; rarely the value.  It is hard to quantify that value because most have a hard time understanding elasticity and projecting unknown demand.  Further few rarely distinguish marginal from average cost.  The intuitive thing for most to focus on is supply, because people fear the unknown (demand).

Second, everyone needs to realize that there is a fundamental problem with policy making in that (social) democrats tend to support and be supported by free market competitors, just as (conservative) republicans have a similar relationship with socialist monopolies.  Call it the telecom regulatory paradox.  This policy paradox is a function of small business vs big business, not either sides’ political dogma; so counter-intuitive and likely to remain that way.

Third, the internet was never open and free.  Web 1.0 resulted principally from a judicial action and a series of regulatory access frameworks/decisions in the mid to late 1980s that resulted in significant unintended consequences in terms of people's pricing perception.  Markets and technology adapted to and worked around inefficient regulations.  Policy makers did not create or herald the internet, wireless and broadband explosions of the past 25 years.  But in trying to adjust or adapt past regulation they are creating more, not less, inefficiency, no matter how well intentioned their precepts.  Accept it as the law of unintended consequences.  People feel more comfortable explaining results from intended actions than something unintended or unexplainable.

So, just like skiing, we’ve identified 3 principles of telecoms and information networks that are counter-intuitive or run contrary to accepted notions and beliefs.  When we discuss policy debates, such as net neutrality or SOPA, and corporate activity such as AT&T’s aborted merger with T-Mobile or Verizon’s spectrum and programming agreement with the cable companies, we will approach and explain them in the context of Metcalfe’s Virtue (demand vs supply), the Regulatory Paradox (vertical vs horizontal orientation; not big vs small), and  the law of unintended consequences (particularly what payment systems stimulate network investment).  Hopefully the various parties involved can utilize this approach to better understand all sides of the issue and come to more informed, balanced and productive decisions.

Vint supports the notion of a civil right (akin to universal service) for internet access.  This is misguided and unachievable via regulatory edict/taxation.  He also argues that there should be greater control over the network.  This is disingenuous in that he wants to throttle the open-ness that resulted in his godchild’s growth.  But consider his positions at Google and IEEE.  A “counter-intuitive” combination of competition, horizontal orientation and balanced payments is the best approach for an enjoyable and rewarding experience on the slopes of the internet and, who knows, ultimately and counterintuitively offering free access to all.  The regulators should be like the ski patrol to ensure the safety of all.   Ski school is now open.

Related reading:
A Perspective from Center for New American Security

Network Neutrality Squad (NNsquad) of which Cerf is a member

Sad State of Cyber-Politics from the Cato Institute

Bike racing also has a lot of counter-intuitive moments, like when your wheel locks with the rider in front.  Here's what to do!

Posted by: Michael Elling AT 01:23 pm   |  Permalink   |  0 Comments  |  Email
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Phone: 973-222-0759
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