Climate Change 2014

President Obama delivered a broad and sweeping speech at the University of Queensland in Brisbane on Saturday where he’s attending the G20 Summit. Fully one-third of it was devoted to climate change and what the US and others are doing about it. Following on from highly significant joint announcements with China in Beijing a few days ago, the President announced a further $3 Billion commitment to the Green Fund to help emerging nations combat the climate crisis. This was greeted with rapturous applause in a standing ovation.

I was struck by how momentous these two events were. For the Presidents of China and the US to release a communique in China at an APEC meeting on ambitious emissions reductions targets is historic. For Obama to follow that up days later in front of predominantly young people with a pledge to pay for poorer nations help too is a symbol of hope and optimism. He said this:

Obama G20 Barrier Reef quote

Never before have the leaders of the two greatest and most powerful nations, themselves the two greatest polluters, announced anything like this. It remains, of course, to see if they fulfil these commitments and deliver the reductions in emissions within the timeframe. The Secretary-General of the United Nations, Ban Kee Moon, publicly proclaimed Saturday morning in Brisbane that Climate Change was “the defining challenge of our times” and that the G20 should focus on it. After more than 2 decades of UN efforts on this issue going back to the Earth Summit in Rio in 1992, this is also the strongest endorsement a UN Chief has given – almost in the form of an instruction to the leaders of the world’s 20 biggest economies.

Earlier this year, the Pentagon announced that climate change is a leading global security issue. While this made news, it was widely regarded as a statement of the long-understood obvious from the environmentalists. Climate change deniers didn’t even bother to raise much of an objection. Insurance companies, not exactly a bastion of left-wing liberal thought or a tabernacle of altruism, have become very vocal this year on the economic effects of climate change. Increased loss due to damaging natural disasters linked to a warming climate – severe weather events, droughts, wildfires and so on – have clearly shown up in their accounts:

Natural Disaster Costs

Alternative energy has also made significant progress this year. There are some poster-child efforts from electric cars (like Tesla) to solar-powered bicycle paths in Holland. But the underlying reality is much broader and deeper. Over 10% of homes in Australia now have solar panels on their rooftops. Rising electricity prices are driving widespread adoption of more energy-efficient appliances. Over 10% of the commuter traffic volumes in and out of the central business district in Melbourne is now by bicycle. Windmills are showing up all over the countryside all over the developed world to augment grid power. Energy-use awareness has entered the common vernacular in many places. Germany and France have widely publicised their very broad adoption of eco-friendly energy production. People are downsizing their cars and using them less frequently in favour of public transportation, scooters and bicycles.

The fight against the climate crisis has started to become a populist movement, particularly among the young and the rich. It’s no longer just cool to be green. Now it’s definitely uncool to be a conspicuous consumer of energy. Populist action at a community level seems to be achieving things that neither legislation or international parastatal organisations could not or did not. No amount of carbon taxation, emissions trading schemes or reports from the UN have reduced actual carbon pollution as much as this people-power movement seems to have done. At the G20 in Brisbane, the President announced that carbon pollution in America is the lowest it’s been for 20 years.

Since I first wrote about Climate Change in this blog 8 years ago, something significant has happened. Citizens and society has moved from a more-is-better attitude to energy use to a better-and-less approach. I can see it in my own household. Six years ago, I drove a car with double the per-kilometre emissions twice as much as I do today. For 15 years prior to 2012, I flew frequently internationally and domestically, on business and on vacation. I haven’t been on a plane for almost 3 years. We bought a new refrigerator the summer before last that uses half the electricity the old one did. Even my father is considering putting solar electricity generation into his 20+ year old home!

Climate Change 2014 is very different to Climate Change 2006. Perhaps the Global Financial Crisis and its aftermath consequences has made more people in the developed world more frugal. Perhaps the political correctness of being green has had an impact. Certainly greener technology has developed in recent years and its widespread adoption has brought prices down. Maybe all these things have happened. There have been negative things too. Decade-long droughts, very hot summers, depleted urban and farming water supplies in some very wealthy places like California and SE Australia. There have been very severe storms: hurricanes in the Atlantic, typhoons in Asia and cyclones in northern Australia. Some winters in some places like the eastern seaboard of North America or Eastern Europe have been very severe too, while at the same time Alaska has had very warm winters. The last two winter Olympic Games – in Soichi, Russia and southern British Columbia – were starved for snow.

The media has done an extremely comprehensive job of broadcasting all this through the established technologies – newsprint and television in particular. New media – social networking on the Internet especially – has done an even better job. The explosive adoption of mobile technologies – mostly smartphones and “phablets” – has made the new media and the old collide in ways never before imagined. Established and newer media players have seized the convergence opportunity in new and better business models to reach an ever-growing and much younger audience.

This is precisely the demographic predisposed to the climate change issue and action to combat the climate crisis. A virtuous spiral of the media feeding and becoming the message on climate finds an already engaged generation who want to do more than passively receive bad news and maintain a status quo. If anyone had told me as a university student that the way to meet the looming environmental challenge of the next 40 years was to connect devices on-line with a consciousness in the next generation and the one to follow, I wouldn’t have believed it. Looking back, my ancestors – my auto industry father and grandfather, my uncle and grandfather in the mining business – would have refuted out of hand that a shrunken-down computer with a radio-telephone in it could change the world in such a way.

In his G20 speech in Brisbane in front of University of Queensland students, the President mentioned quoting one of their alumni in a tweet on Twitter to his 30 million followers. He is, after all, the most on-line President of the United States that’s ever been. But what got much more adulation was his commitments on climate change and his acknowledgement of the importance of women and gay rights. For all the talk on hard power and the rebalancing of American military resources to the Asia Pacific, climate and GLBT equality seemed to strike a chord with his young audience. That, if nothing else, is cause for great hope for the future.

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Changing the Car (Business)

Tesla Motors held a media event this week to announce two things: a dual-motor version of its Model S sedan and some driver-assist features called Autopilot. As with most of Tesla’s media announcements, there was significant speculation and hype followed by viral coverage after the fact. Elon Musk, their CEO, tweeted something a few days before the event to spark this off. He is, much as Steve Jobs was, a practiced media performer who knows how to make great products and get them noticed.

Elon is also on a mission to redefine the automotive industry. He is not the first to make electric cars. Ferdinand Porsche showed one at the Paris Exhibition in 1900. Musk is different than other Auto execs. Like Henry Ford, he is an engineer, but unlike Ford was when he launched the Model T he is already successful and wealthy. Elon is by far the wealthiest CEO in the car business. Like Daimler and Benz, he makes premium vehicles with significant technological innovations that matter for car drivers. But most of Tesla’s innovations are more like information and communications industry products than mechanical engineering breakthroughs. Most importantly, and potentially impactful, his business model is radically different than anyone else’s in the industry today. He has no dealer network, he builds “supercharger” stations that provide free energy to his customers and he has modest physical infrastructure and massive intellectual property resources.

As with any disruptor, there is opposition from the incumbents. For years, the conventional wisdom in the automotive ecosystem said Tesla’s goals were impossible. Early products were heavily criticised for all sorts of reasons. More recently, there have been a raft of legal challenges from car-dealer associations to his direct-selling activities. Some have succeeded, some failed and a few that succeeded have been overturned. The success of the Model S – a “mid-sized” sedan in American car parlance – has been hard to ignore. I test-drove one of these here in Australia last week and was seriously impressed. It has won no less than the Car and Driver magazine’s Car of the Year award.

Tesla’s ambitions are much greater though. They want to become a significant volume producer in the coming years. This is no pipe-dream. They are investing, alongside supply chain partners, in large-scale production capacity as well as cutting-edge manufacturing capabilities. Their so-called “Gigafactory” in the US southwest, designed to make batteries, is one of the largest in any industry ever. They want to be a premium product producer. Last week’s announcement of the dual-motor Model S is up there in super-car territory. Only Audi’s new RS7 and Mercedes’ new E63 AMG S come anywhere near close. Tesla want to up-end the dynamics of the car business by putting the driver at the centre and the vendor second. Everything about their approach is personalised and customer-intimate.

Challenges remain. Engineering a car like the Tesla Model S P85D has been a long and slow road. Making a lower-cost, higher-volume vehicle will not happen quickly. But opportunities abound. In the last two years, Tesla’s stock price has risen ten-fold, much like a technology start-up. Their non-US operations are growing well – they launch here in Australia in coming weeks. The Supercharger network is being built out and, if any, is ahead of schedule. Next year, there will be several constructed between Melbourne and Sydney. Solar-powered charging kits are already available to put on a garage roof, for a modest up-front investment.

The old adages of limited range are becoming less and less of an issue. Most people refuel their gasoline-powered cars in an urban area. The “limitation” of time-to-recharge has been overcome. Tesla can robotically replace the entire battery-pack in the vehicle faster than a petrol-powered car can be refuelled (about 2 minutes). Renewable (and nuclear, elsewhere) electricity is, finally, becoming much more mainstream. A plug-in electric car really doesn’t and should not need to be using power produced by fossil fuels. Driving a high performance car need not sacrifice practicality any longer. The dual-motor Model S looks like a stylish family sedan but can get to 100 km/h is just over 3 seconds.

Most importantly, Elon Musk is a serial innovator. He was part of the PayPal mafia. His rockets deliver supplies to the Space Station. He is also an Open Sorcerer: he has offered the technology for the Tesla royalty-free for anyone that wants to build electric cars and had published the designs for the Hyperloop online for anyone that wants to build it. Tesla and SpaceX are not the last of Elon’s works we will see. He wants to change the car, the car business, several other businesses (like Jobs) and perhaps change business itself. He persists when others withdraw. His engineers work tirelessly to deliver on his vision. His sales people – and there are precious few of them – treat prospects and customers like people in a very sophisticated and modern way. There is nothing greedy or impersonal about any of this. Elon wants to change the world and Tesla is only one way he is doing that. I look forward to Tesla coming to Australia and relish the prospect of becoming one of his customers one day.

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Changing Gears

Enterprises and government agencies the world over are busy changing gears these days. Large global publicly-owned commercial firms are seeking to get more agile and nimble. Small, often family-owned, private businesses are trying to become more mature to cater for growth whilst remaining responsive. Public sector organisations, to the extent they can, are trying to deliver outcomes for citizens faster. Speed, it seems, has become a number 1 issue for everyone. Cost and quality are definitely the next priorities but going quickly is a huge imperative.

The changes required are profound. The world outside organisations – particularly those using the products and services they provide – want new and improved offerings all the time. The world itself is changing at an unprecedented rate. Just keeping up with the demand for change – in many ways: socially, economically, technologically and practically – is mind boggling. The changes inside most organisations are lagging these external changes. It often requires “changing gears” to get the traction required to meet the challenge. Sometimes these gear-changes require new leadership. More often they need new approaches: updated methods, different skills, outside help and most importantly a fresh perspective.

Big multi-national organisations like international corporations find this very challenging. The successful ones with long track records of growth in many markets and many products or services are employing “rebalancing”. Euphemistically, this often means shifting focus from things that are not growing to newer things with growth potential. Smaller companies who’ve historically done one or two things well often get into other lines of business. Government agencies employ “reforms” – either a different way of doing the same thing or augmenting existing functions with additional responsibilities. The growth of public-private partnerships all over the world is a great example.

Technological change is both a driver and an enabler of changing gears. The relentless shift to providing on-line channels between producers and consumers has ramped up in recent times. You can see it in the high street shops. There are now less bookstores, music shops and video libraries. There are more cafes, restaurants and boutiques. The supermarkets and especially department stores are being replaced by petrol stations with convenience stores and fast-food outlets. Books, music and video content have shifted online the most. Business-to-consumer electronic commerce has been eating away at retailers at an ever-accelerating rate. People sit in cafes with their mobile devices for a few minutes then do their everyday shopping while they pay for fuel. Even paying for things has become more and more technically enabled: PIN & chip cards, tap-and-go cards and in a few cases using your smartphone. At one bank here in Australia, even the ATM allows you to transact with your smartphone app rather than the ATM itself.

All of these things have emerged to save people time. Yet all of these changes in the community involve even greater changes on the organisations serving the public. They revolve around speed-to-market and cost-to-delivery for many. For others, it involves participating in business-to-business electronic commerce, often alongside competitors. Employees increasingly work from home at least some of the time in an increasingly casualised relationship with their employer. People collaborate across borders, timezones and organisations in evermore virtual ways. Manufacturing and agriculture, already impressively automated in the developed world, is moving to new and different geographies supplying a more globalised marketplace. In Kenya, more people and small businesses use virtual banking and finance than real accounts with physical financial institutions. Microfinance is similarly prevalent in the developing world.

Many organisations do not make the change. Some get acquired by larger firms rather than attempting the change. Many go out of business before they can change. Some larger publicly-listed companies become privately-held in order to make the changes necessary which can be a very severe form of changing gears. Traditional media is severely under threat from new and social media. Governments continually shift expenditure priorities from physical services to e-government services. Taxation agencies are particularly noticeable in this space. On the other side of the spectrum, postal agencies are shrinking in response to diminished use of ‘snail-mail’. All of these forms of transformation are accelerating in step with the demand for newer and often more digital offerings. Even large-scale philanthropy – the so-called “philanthrocapitalism” – employs modern and very digital ways and means of supporting their causes.

Yet most of the world’s people remain remarkably untouched by these titanic forces. “Only” a third of the world’s people are connected to the Internet. Half of humanity, mostly in the developing world, do not live in an urban area. Wealth and income have become concentrated among the rich few at a level not seen for a century. Education and employment opportunity still elude many. National, provincial and local tax revenues are being impacted by the sleepless world of transnational money in tax-havens and other arrangements. Capital markets have become “irrationally exuberant” again. But most people, two-thirds of humankind by some estimates, only ever see this on television.

It is true that globalisation and economic rationalism has brought great benefits to the world at large. Over the last thirty years, billions of people have been raised out of poverty because of it. But it’s also true that many have been left behind – and not only in the developing world. In the advanced nations, the middle class and older people have borne the brunt of the wealthiest becoming more wealthy. Corrupt and oligarchical minorities have benefitted at the expense of the majority in emerging countries. The numbers of poor across the world are dropping proportionally but increasing nominally. The global environment has also been impacted enormously.

Perhaps the greatest gear-change required is not so much within organisations, although they are certainly needed. The big gear-change is towards a more holistic perspective and a more inclusive one. Climate-change denial needs to become more akin to Holocaust denial: a criminal offence in some jurisdictions and certainly unacceptable behaviour elsewhere. War and terrorism similarly can’t go on the way it has been for the last few decades. Income and wealth inequality needs to be addressed before it becomes a trigger for unrest again. A new perspective is needed: one that considers the global impacts of an increasingly globalised world. We in the developed world have an historic opportunity to lead here. I hope we find the gear-lever to make the change in time…

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Changes in Philosophy & Doctrine at Microsoft

Last week, Microsoft released Office for iPad. Many, including this writer, thought that long overdue. Few now think the time has passed for this software on that platform – including some who thought it was but have now retracted that view. The product has been well received and is being rapidly adopted. Thank goodness for that. We’re all expecting a similar release on Android sometime soon. I’m sure it will do very well too.

It was inevitable whatever the timing. Tablets are everywhere. Android & iOS are now the dominant platforms for the Post-PC world. Microsoft’s Surface has been, well, a dud (to put it mildly). Windows 8 is a similarly disappointing release but not to the same extent as Surface. Touch-enabled PC form-factors like Ultrabook 2 and other “convertibles” bring out more of the benefits of Windows 8 but the modern (aka Metro) user experience has not been well received at all. The expiration of support for Windows XP has spurred new PC sales after years of flat or declining sales. But all of this has not affected the onward and upward growth of tablets.

This is not surprising. Tablets are not a kind of PC, as Microsoft believed in the last years of Steve Ballmer’s reign as CEO. The attempt to make them so has resoundingly failed. Nor is Office going away anytime soon, as the most vehement anti-Microsoft proponents of the Post-PC world will have you believe. A billion Office users can’t all be wrong. The accumulated volume of Office documents over the last 2 decades is a huge reason to keep using these tools. But now the past, present and likely future of the knowledge worker’s world have come together in Office for iPad.

The changes in doctrine and philosophy at Microsoft are large, profound and (hopefully) permenant. These changes signal a more hopeful future for their place in the unfolding Post-PC world. The apps themselves are, to a point, free from Apple’s iTunes AppStore – full functionality is enabled by a paid subscription to Office365 or an in-house enterprise license. There are supplementary tools – the Enterprise Mobility Suite – that enable large-scale management. Documents are stored in Microsoft’s OneDrive cloud storage facility. And, importantly, any in-app subscriptions to Office365 from Office for iPad are subject to 30% revenue sharing with Apple. The difference between this device+service approach, especially bridging two Cloud ecosystems, and the traditional Microsoft business model is staggering. It would have been unthinkable only five years ago.

It is fitting that this announcement be delivered by Microsoft’s new CEO Satya Nadella in the 52nd day of his tenure. It was foreshadowed by Steve Ballmer last year and I’m sure the product itself has been in development for many years. That Microsoft delivers an edition of Office on an Apple platform is nothing new. They’ve been doing it in one shape or form since the inception of the Macintosh. What’s very different is how they’ve done it. In short, they’ve done it according to someone else’s business model – Apple’s. That’s radically different. They’ve decided to give some software features away for nothing and charge for others on a yearly or months subscription basis. That’s not quite as profoundly different – Microsoft has been adopting that approach very gradually for a long time. The software itself is a curious hybrid between Microsoft and Apple user experience styles. That has also been done for years. But $100 per annum for 5 licences of Office on Office365 on PCs, Macs & iPad is new, particularly the iPad piece.

If Microsoft embraces (the competitive horror of) Android tablets in the same way, there is great hope for the future of their software. The one billion Office users, 200 million iPad users and 500 million Android tablet/phablet users could all become Microsoft office users. The promise of anywhere, any time and on any device – a Microsoft marketing catch cry for almost 15 years – could be much closer to being realised in the modern mobility world. An iPad Air running an A7 processor and iOS7 is certainly capable enough to start the ball rolling. Similarly capable Android tablets are too. Future (presumably Nokia designed and made) tablets would certainly be with a future Windows, perhaps even if they ran the “Metro”-skinned Android. Platform plurality is back with a vengeance and it’s certainly good to see Microsoft making room in their philosophy and doctrine for that fact of life.

Google has iOS apps – and some extremely good ones – on the iOS platform. Apple does not reciprocate on the Google platform (but has shipped iTunes on Windows for a decade) and is never likely to, even though Android hugely outsells iOS. What we’re seeing now are the consequences of competitive forces in the marketplace on very large corporations. Cisco has aspirations to being a meta-Cloud player. Maybe that too will work. But nobody has had an installed base of over a billion users has ever done anything like this before. We are living through a milestone change in the history of technology companies. It just such a shame that it took this long for it to happen…

 

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My Industry Has Changed

Every once in a while, you get to see what you once wished for come true. Less frequently, you get explicit advance notice that it’s going to happen. In the last couple of weeks, both of those things happened – the technology industry changed and I was given a heads up.

Trying to change large iconic corporations from the inside is almost futile until they need to change. In an industry like technology, there’s a mythology about change. The myth is that change is continuous and ever-present; the reality is that things largely remain the same until change in unavoidable and often a matter of survival. I learned this at Microsoft 10-15 years ago and at IBM 5 or so years ago. At Microsoft, I advocated things like smart mobile devices, online content stores and a few other things. At IBM, I advocated for the Cloud, in-car tech and a few other things. Now the time has come for many if not all of these changes.

Yesterday, Microsoft announced its intention to purchase Nokia’s handset & services business units only a week after long-timer Steve Ballmer announced his forthcoming retirement. This adds substance to their announcement last month of becoming a devices and services company, despite many false starts in that direction over a decade or more. The impact and meaning of these announcements are all being widely discussed. One of my old buddies at Microsoft gave me an informal warning only days before any of this happened. One day, we’ll all know and understand what this all means. For the moment, it means huge change.

A few weeks ago, Amazon beat IBM in a public procurement exercise for the CIA’s Private Cloud. Amazon was more expensive by a half, yet they still won. IBM appealed and their case is moving along the process (update: IBM has given up). What astonished me about this case was the CIA’s comment that Clouds “auto-scale” and there was more confidence in Amazon’s offering than IBM’s in this regard. Elastic scalability is an essential characteristic of a Cloud. I expected not only that IBM would know that but that they could do it and demonstrate that to a valued customer. One of my old buddies at IBM discussed this with me and later negotiated his exit from the firm. What that means down the road is still a matter of debate. I never thought I’d see IBM come anywhere near losing a big deal to Amazon. In fact, Amazon is crushing all its competitors in the Cloud.

Amazon competitive Nov 2013

It seems that Apple – 90 days away from bankruptcy in 1997 – and Google (founded in 1998), have risen to redefine an industry. They rose from their much more humble places over the last decade or so to reinvent whole industries. Together with their near-end supply chain partners – Samsung, Foxconn, Pegatron and others – they stand titans of the tech business where IBM, HP, Microsoft and others once stood. In last year’s Fortune magazine’s Global 500, only Apple & Samsung Electronics were in the top-20 rankings. The giants of yesteryear have all fallen into the middle rankings.

That one set of companies replace another as leaders in any industry is nothing new. That this set of now-giant corporations have so quickly and completely relegated the titans of the last quarter-century to saving themselves through reinvention is rare. I was fortunate enough to work with IBM during their transformation in the early 1990s – quite an experience. The scale involved this time is extraordinary – the numbers and dollars in play are extreme: billions of people, hundreds of billions of dollars. I’d say I’ll never see this again in my lifetime.

So, my industry has changed. I’m trying to find my place in this new order. Hopefully, my good fortune will hold up going forward as it has for the last 3 decades or so.

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Changing Fortunes

Last week, if you read the press, Apple’s world changed. ExxonMobil overtook Apple as the world’s most valuable company by market capitalisation, after Apple held that slot for just over a year. Apple today is being compared to Microsoft in its heyday 13 years ago. Some commentators have declared Apple past their peak, both in commercial performance and innovation capability. It must be hard to be Tim Cook at the moment.

Curiously, this coincided with Apple’s quarterly earnings announcement for the holiday season in 2012. By most measures, it was an outstandingly successful time for them: record revenues and very healthy profits. It was the biggest quarter by revenue of any company in history in terms of sales in value. Only Exxon has ever had anything like these profits.

Apple Dec 2012 Quarter in Context

But the numbers disappointed stock market analysts in a some very impactful ways, mostly around profit growth and a few other things. The stock plummeted to its lowest point in over 12 months in a matter of days.

This has happened before to other companies. Exxon, Microsoft, Cisco, GE and others have all had big highs followed by large declines in their stock prices. The shape of this peak in the graph stock price over time exhibits the similarity:

Peak Stock Prices - AAPL MSFT CSCO XOM GE

The Wall Street Journal has dubbed this “The $500 Billon Curse” and declared that Apple is not alone. The parallels with Microsoft go a bit deeper. In the last days of 1999, the world was a-buzz with dot-com fever and worries about Y2K. Microsoft was the darling of growth companies with a stock price more than double what it is today (and twice the average of the last 10 years). A big product release – Windows 2000 – was imminent. The PC business was extremely buoyant and Microsoft’s software ran half the Internet. In January 2000, Bill Gates stepped down as CEO. But there are some key differences too. In early 2000, the “tech wreck” plunged the NASDAQ from its peak to a wasteland of lost capital. In less than 6 months, Microsoft had lost two-thirds of its market capitalisation. Margin-calls on option-based borrowing were rife. Some Microsoft employees declared themselves bankrupt rather than cover their losses. I know. I was there at the time.

The reality of Apple today is that they are an enormous company: over 80,000 direct employees with revenues of over $160 billion per annum. They have over $120 billion in cash. They sold 75 million iOS devices (mostly iPhones & iPads) in 12 weeks. They have over 500 million iTunes customers and 200 million iCloud customers. Their supply chain is similarly huge. They, unlike Microsoft in 2000, lost their founder-CEO Steve Jobs to cancer in 2011. There were recent misteps, around Maps & Siri that lost a lot of trust from a lot of people. But the most important reality today is the twin challenges of competition in a maturing marketplace. That changes the fortunes of almost any company in any industry.

Samsung and Google have teamed up to be the most formidable competition to Apple. Amazon is another very strong competitor. The other significant dynamic affecting Apple is a kind of internal competition. The iPad is cannibalising some Mac sales and the iPhone (and its sibling the iPod Touch) are cannibalising iPod sales. Tim Cook is right to see this as an opportunity rather than a problem but the transition takes time and worries investors. Apple is also doing a lot more things now than it was when the iPhone and iPad were released. That creates competition for internal resources. And then there are all the patent lawsuits that consume enormous amounts of time and effort that are a distraction to direct competition and effective internal management. As Tim Cook said of them, “They’re a pain in the ass”.

Of course, Google and Samsung have had many kinds of relationships with Apple over the years. Eric Schmidt, Google’s Chairman and former CEO, sat on Apple’s Board for years. Andy Rubin, Head of Google’s Android division, is ex-Apple. Samsung has been a major supplier to Apple for many years although Apple is winding that relationship back. Even Google is reported to have counselled Samsung in 2010 that the Galaxy S II smartphone was a bit too much like the iPhone. And of course, there was the landmark finding in a US court last year that confirmed the opinion of many that Samsung had indeed infringed on Apple’s patents. But since then, a few of those patents have been declared invalid. More and more patent cases are being thrown out of court. It seems Apple’s intellectual property is not as legally safe as it was before.

Samsung’s execution, patent infringements notwithstanding, has been superb. Their Galaxy S III series of smartphone and a number of other Android-based devices are selling extremely well. Samsung has a very vertically-integrated business model right down to silicon manufacturing. Their partnership with Google on the Android side seems to work very well indeed. Samsung’s sales and marketing expenditures in the smartphone market segment are 10 times what Apple’s are in recent years. Their relationship with the telecom carriers is excellent and getting better whilst Apple’s was never very good and is getting worse.

But more importantly, two sleeping giants have been awakened by this titanic struggle: Microsoft and Nokia. It’s early days yet but there are signs of momentum emerging from this partnership. Microsoft understands the enterprise software market much better than Apple or Google. Nokia understands the telco handset device business much better than Samsung. Both Microsoft and Nokia need their partnership to work as a matter of future viability, although other handset makers are getting on the Windows Phone 8 bandwagon now. Nokia has some very important cloud assets that Microsoft leverages in their online properties, like maps. Both Microsoft and Nokia know what it’s like to be dominant and lose it. But they’ve both left their run very late in the game and have no appreciable market share in advanced modern smartphones or tablets. It’s a very much do-or-die scenario for them both.

Apple has been down before. They’ve suffered the slings and arrows of intellectual property loss before. They’ve certainly had internal missteps before. What started out as a dream run for Tim Cook after Steve Jobs has turned into one of the most challenging situations in the history of the US technology industry. I have faith in what they’re doing. I hope they can execute at least as well as most of their competition.

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Changing Business Models

The last 60 days has seen some extraordinary activity in the mobile device space. Apple announced at its Worldwide Developers Conference a new high bar in portable computers, its own mapping service and a slew of software features in their upcoming iOS 6. Microsoft announced the Surface tablet and a new mobile phone operating system Windows Phone 8. Today, they bought PPI, the firm that does the large mulit-touch displays used by CNN. At Google I/O, the Nexus 7 tablet and Android 4.1 “Jelly Bean” and other things were unveiled.

Unofficially, the rumours of a smaller iPad have never been louder and there’s new speculation of Amazon refreshing the Kindle Fire and perhaps introducing a smartphone. As one old colleague put it to me, “there’s never been this much excitement! ”

But the real excitement should be reserved for what this all really means. What does it mean that Google Maps won’t be the default mapping app on iOS (and OS X)? What does Microsoft getting into big touch displays & the tablet-PC hardware business mean – particularly for the hardware OEM partners, like HP? What’s the meaning of Google making and directly selling tablets (and phones) on its website? Why is Amazon so intent on making and selling hardware to consume the content in its online store?

The phrase “vertical integration” used to be such an ugly term. It was synonymous with other bad words like “closed” and “proprietary” (as opposed to “open” and “standards-based”). It evoked horrible nightmares of vendor lock-in and walled-garden ecosystems. It was the very thing that customers had pilloried IBM for in their heyday in the 60’s, 70’s and 80’s. It’s what everyone thought killed DEC in the 90s.

Over the last decade, Apple has made a virtue of vertical integration. iMac, iPod, iTunes, iPhone and iPad have all been roaring successes. Even their stores are world beaters. The commercial results have been astounding both in terms of volume and profitability. Their secret sauce is how to continually innovate highly integrated products and run a highly efficient supply chain in tandem. That means getting the hardware, software, communications and services to work brilliantly well together whilst managing the partners who manufacture and assemble the devices. What once was conventional wisdom – for a company to do almost everything itself – has now reemerged in a newer form at Apple. The only thing Apple doesn’t do itself is manufacture and assembly of the hardware (but almost nobody in the US or EU does either).

Update: MIT Sloan has done a study of changing business models. They chart the impact of these changes at Apple.

Apple - Changes in Business Model

It now seems many elements of Apple’s model has some attraction to the like of Google, Microsoft and Amazon. The original idea behind the Google Nexus smartphone (a joint venture with Samsung) was to demonstrate to the hardware ecosystem how to make an Android phone that delivered maximum support for the Android software platform. Microsoft (and Intel) have tried this approach before too. Microsoft’s Signature PC spec and Intel’s Ultrabook reference platform were intended as guides to others on how to build hardware products.

But this, it seems, was not enough. Almost nobody built Signature PCs and the Ultrabook initiative has so-far failed to produce adequate competition for Apple MacBook Air. In fact, the Ultrabook is so much like the “Air” that legal proceedings are almost imminent. Apple vs Android patent cases are everywhere and still Android tablets do not seem to be selling well. Twice as many iPads are sold as all the Android tablets put together.

What is required, if recent announcements are any indication, is for Microsoft to design and directly sell in its own retail shopfront stores the Surface tablet (even if it outsources the manufacture and assembly, as Apple does). It also looks like they’ll be in the touch digital whiteboard game. What Google’s done goes one step further – they design & directly sell a phone, a tablet and a TV set-top box (all made by others) that only work with the Google Play store, a single one-stop online shop rather like iTunes.

The change at Amazon is more subtle but still important. They’ve focussed on extending their store and their single device – the Kindle – to be more like an iPad only much cheaper and significantly smaller. Both Apple and Amazon have the 300 million or so one-click credit card customers in their online store. Apple had the music & video content, Amazon had the e-Book content. Then they both invaded each other’s turf. Apple went into books & magazines and Amazon went into music & video. The Kindle had the advantage of running as software on the Apple platform but Apple had the advantage of disconnecting the Kindle iOS & OS X apps from the Amazon store. Apple is still way behind Amazon on books but Amazon is way behind Apple on music, TV and movies.

These changing business models are nothing short of titanic shifts in the ICT landscape. It is being fought by the giants of the industry – Apple, now the world’s largest company by market cap, towers over a once-mighty Microsoft. Amazon & Google, once dot-com startups, are now very significant global companies. For Apple to become the template that reshapes its own industry would have been unthinkable only a few years ago.

It is as Bill Gates remarked to Steve Jobs just before Steve’s death last year – “you proved your model works too”. I wonder if Gates grasped the deeper meaning of his words. It seems Apple’s business model has become the pattern guiding the changes to Microsoft’s business. Steve must be smiling wherever he is…

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